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Marsh McLennan Earnings: Strong Growth and Margin Improvement Continues

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Narrow-moat Marsh McLennan MMC produced another strong quarter with overall revenue up 13% year over year, or 10% on an organic basis. The company also continues to see strong margin improvement. We will maintain our $157 fair value estimate, and we see shares as a bit overvalued. While we appreciate the company’s near-term prospects, we think Marsh McLennan will eventually return to the low- to mid-single-digit growth it has generated historically. The market, in our view, is overly focused on the company’s current path.

The brokerage business continues to perform well, with revenue up 11% year over year on an organic basis. While management suggested the benefit might start to ebb, we think the segment continues to benefit from a strong insurance pricing market. The company is now also seeing a lift from higher interest rates and better fiduciary interest income, which roughly tripled year over year and added 3 percentage points to segment growth. We think the near-term prospects for this business remain bright, but with insurance pricing seemingly starting to settle, we think growth might start to pull back toward historical norms once the company laps the rise in interest rates.

The consulting side of the business also turned in a solid quarter, with revenue up 9% year over year on an organic basis. Oliver Wyman, which tends to be the most volatile unit quarter to quarter, saw 12% growth. We think the current macroenvironment remains favorable for this side of the business. But if the economy slips into a recession, this area will come under the most pressure.

Adjusted operating margins improved to 21.3% from 19.6% last year. The improvement appears to have come mainly from higher fiduciary interest income. But management is focused on reducing costs and raised its cost reduction target from $300 million to $400 million by 2024. While we appreciate the company’s diligence on this front, we think its ability to improve margins long term may be somewhat limited.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Brett Horn

Senior Equity Analyst
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Brett Horn, CFA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers insurers and credit bureaus. He also oversees the equity research team’s stewardship rating methodology.

Before joining Morningstar in 2006, Horn worked in the banking industry for about a decade, most recently as a commercial loan officer for First Bank, where he was responsible for underwriting loans and managing relationships with middle market clients. Before that, Horn worked for Mizuho Corporate Bank, where he managed loan portfolios and client relationships, primarily with Fortune 500 companies.

Horn holds a bachelor’s degree in business administration, with a concentration in finance, from the University of Wisconsin and a master’s degree in business administration from the University of Illinois. He also holds the Chartered Financial Analyst® designation. He ranked first in the business and industrial services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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