Marsh & McLennan Beats Estimates - Analyst Blog

On August 3, 2010, Marsh & McLennan Companies Inc.(MMC) reported second-quarter adjusted income of $248.0 million or 46 cents per share, ahead of the Zacks Consensus Estimate of 44 cents. This also compares favorably with the income of $190.0 million or earnings of 36 cents in the year-ago quarter. Adjusted earnings per share in both periods exclude one-time items, but include the adjusted operating income of Kroll but not the impact of the disposal transaction.

With the continued prevailing weak economic environment, Marsh & McLennan managed to post improved results on account of top-line growth in all lines of businesses along with significant cost control, thereby driving income higher. Further, the roll-out of Kroll added to the growth of the company.

On a reported basis, Marsh & McLennan witnessed net income of $236.0 million after-tax or 43 cents per share in the reported quarter from the net loss of $193.0 million after-tax, or 37 per share in prior year quarter. The results included discontinued operations, net of tax, of $271 million or 49 cents per share in the quarter, as opposed to a loss of $347 million or 66 cents per share in the prior year quarter. Kroll has been classified as discontinued operation following the agreement of its sale.

Behind the Headlines

Consolidated revenues were $2.6 billion, up 6% year over year and 1% on an underlying basis.

Marsh & McLennan had an investment income of $18 million, up significantly from a loss of $32 million in the year-ago quarter, primarily due to mark-to-market gains within Marsh & McLennan’s private equity fund investments.

However, total expenses increased 22% year over year to $2.7 billion.

Segment Results

Revenues for the Risk and Insurance Services segment were $1.5 billion, up 9% year over year and 1% on an underlying basis. However, operating income was significantly higher by 11% year over year, reflecting improved showing at Marsh and Guy Carpenter, as well as acquisitions.

Marsh's revenues were $1.2 billion, up 9% year over year and 1% on an underlying basis. Guy Carpenter's revenues during the reported quarter were $243 million, up 7% year over year and 2% on an underlying basis. Both Marsh and Guy Carpenter drove the top-line on strong new businesses in the quarter.

The Consulting segment's revenues increased 2% year over year to $1.2 billion. The segment increased 2% on an underlying basis. However, operating income, excluding the settlement of the Alaska litigation declined 3% year over year to $127 million.

Mercer's revenues increased 1% year over year to $838 million but declined 1% on an underlying basis. Mercer's consulting operations had underlying revenues of $588 million, down 3% on an underlying basis. Outsourcing revenues were flat at $161 million, whereas, investment consulting and management revenues increased 17% year over year to $89 million.

Oliver Wyman’s revenues increased 6% to $330 million in the reported quarter and increased 8% on an underlying basis.

Evaluation of Capital Structure

Marsh & McLennan exited the quarter with cash and cash equivalents of $1.5 billion and long term debt of $3.0 billion. As of June 30, 2010, Marsh & McLennan had total assets of $15.6 billion and total shareholders’ equity of $6.0 billion.

During the quarter, Marsh & McLennan Agency acquired The Bostonian Group Insurance Agency. Additionally, Marsh & McLennan is progressing well with the integration process of HSBC Insurance Brokers, acquired during the first quarter.

On June 7, Marsh & McLennan announced the sale of Kroll, Inc. to Altegrity, Inc. for $1.13 billion in cash. The deal is expected to culminate by the end of this week.

Comparison with Competitor

Rival, Aon Corporation (AON) reported its second quarter results on July 30, 2010. AON’s second-quarter income from continuing operations was 81 cents per share, substantially better than the Zacks Consensus Estimate of 75 cents. This also compares favorably with 76 cents in the year-ago period.

Another competitor Willis Group Holdings Public Limited Company (WSH) also reported a second quarter profit from continuing operations of 54 cents per share on July 28, behind the Zacks Consensus Estimate of 57 cents. But, Willis compared favorably with a profit of 52 cents in the year-ago quarter.

Our Recommendation

Marsh & McLennan continues to experience decent growth expansion as a result of well-executed restructuring initiatives, including the divestment plan for Kroll. Going forward, results should somewhat benefit from improved pricing, which will be largely offset by the volatility of the U.S. dollar and tepid revenue growth from the consulting business due to the ongoing sluggish economic recovery

Currently, Marsh & McLennan carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.

 
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