Aon Limited by Soft P/C Market
Aon Corporation (
AOC) will release its 2Q08 earnings results after the market closes on July 31, 2008. A conference call is scheduled for the next morning. First-quarter adjusted operating earnings from continuing operations came in at 71 cents per share, a nickel ahead of our estimate, supported by organic revenue growth as well as margin expansion.
We were pleased with the 1Q08 results, as the company was able to grow its top-line as well as the margins, despite unfavorable market conditions. Further, AOC continues to invest heavily in its core businesses, while exiting the non-core segments. The company recently sold Combined and Sterling as part of its strategy to exit its capital intensive insurance underwriting business.
While AOC continues to win new clients from its business rivals and derive significant cost savings from its restructuring programs, ongoing softening in the property-casualty market will limit any significant margin expansion. Ahead of the results, we are maintaining our FY08 and FY09 estimates and our hold rating on the shares.
At the current price level, the shares of AOC trade at 2.24x the 1Q08 book value of $20.44 per share, an 18.8% discount to 2.76x median of the peer group. On a price-to-book basis, the 18.8% discount looks somewhat reasonable, given an ROE 17.5% below the peer group median.
Our new six-month price target of $48.00 per share incorporates a slightly expanded multiple of 17.0x of our FY08 earnings estimate and 2.26x our estimated book value of $21.20 per share at December 31, 2008. Combined with the 60 cents per share annual dividend, this price target implies an expected return of 5.3% over the period.
BHP Benefits from China and its Balance Sheet
BHP Billiton Ltd. (
BHP)is the world's largest diversified resource company with operations in 25 countries. Notwithstanding the associated anti-trust issues, we believe a potential merger between BHP and
Rio Tinto Plc (
RTP) can deliver synergy benefits and offset rising operating costs, which have been trending upwards.
In addition, the merged company would become the world's largest producer of copper and aluminum, and the second-largest provider of iron ore. Nonetheless, given that Rio Tinto rejected the terms of the original proposal, the deal seems far from certain. Moreover, fear of a global economic slowdown leads us to maintain a cautious outlook on the stock. We retain our Hold recommendation on shares of BHP.
BHP is well positioned to benefit from continuing strong demand, primarily from China and the broader Asian region. The company also has long-term contracts with its customers. The petroleum unit is benefiting from strong oil prices and increasing production from the start-ups of Atlantis and Genghis Kahn in the U.S. and Stybarrow in Australia.
