Lloyd Yates, a member of Marsh & McLennan Companies, Inc. (NYSE:MMC)’s Board of Directors, purchased 4,000 shares of stock on March 22nd at an average price of $37.32 per share, according to a filing with the SEC. Marsh & McLennan provides insurance and consulting services and has a market capitalization of over $20 billion. We track insider purchases because it generally doesn’t make economic sense for insiders to increase their company-specific exposure rather than diversifying; in theory, then, a purchase should signal that the insider strongly believes that the company will do well. Studies of insider purchases show that they tend to narrowly outperform broader market indices (read our analysis of studies on insider trading).
The company’s 10-K shows that Marsh & McLennan Companies, Inc. experienced a 3% increase in revenue in 2012 compared to the previous year which is in line with the CAGR over the last four years. So going forward we would expect top line growth to continue to be low. However, over this four year period excellent cost management has resulted in an improvement in earnings each year: a loss in 2008, about $240 million in net income in 2009, and then growth up to $1.2 billion last year (representing 18% higher earnings than in 2011). While future earnings growth should be limited by the modest revenue numbers- Marsh & McLennan cannot grow through increasing margins forever- it could well be positive for some time. At a trailing P/E of 18, however, the market is setting a high bar for the company’s future earnings.
Billionaire Tiger Cub Andreas Halvorsen’s Viking Global cut its stake in Marsh & McLennan Companies, Inc. by 52% in the fourth quarter of 2012, but the fund was still the largest holder of the stock in our database of 13F filings for the end of December at a position of 1.6 million shares (see Halvorsen’s stock picks). Adage Capital Management, which is co-managed by Phil Gross and Robert Atchinson, increased its holdings of the stock to a total of 1.1 million shares as of the end of 2012 (find Adage’s favorite stocks).
Peers for Marsh & McLennan’s insurance business include Aon PLC (NYSE:AON) and Willis Group Holdings PLC (NYSE:WSH). Aon trades at 21 times trailing earnings, placing it at a premium; however, Wall Street analyst estimates imply a forward P/E of 12, so they at least believe the company has better prospects than Marsh & McLennan. In the fourth quarter of 2012, Aon’s earnings were up 10% versus a year earlier though revenue growth was considerably lower. Willis, meanwhile, carries a forward P/E of 14, and in addition to being cheaper on that basis the stock also pays a slightly higher dividend yield- close to 3% going by current prices and recent dividend payments (Marsh & McLennan’s dividend yield is 3.5%). So in terms of valuation Marsh & McLennan isn’t too attractive as an insurance company.
What about the consulting side of the business?
The consulting business can be compared to that of Accenture Plc (NYSE:ACN) and Booz Allen Hamilton Holding Corporation (NYSE:BAH). There is a significant discrepancy in terms of market sentiment on these companies, though recent financial performance has been varied as well. Accenture’s earnings were up 9% in its most recent quarterly report (for the fiscal quarter ending in November) compared to the same period in the previous fiscal year, with revenue lagging there as well, yet the stock carries trailing and forward P/Es of 21 and 16 respectively. That seems a bit pricy to us, and we think that we would avoid Accenture. Booz Allen has seen its business decline recently (the company does do quite a bit of business with the federal government and may suffer from spending cuts) and the stock is down 22% in the last year. It trades at 9 times earnings, whether we consider trailing results or forward estimates, and at a five-year PEG ratio of 0.7. This is certainly cheap, and it might be worth looking into how damaging spending cuts would be to Booz Allen.
Marsh & McLennan and some of its peers appear to be only modestly increasing their revenue, and so we would expect that over time these companies will find it difficult to grow their earnings enough to prove undervalued at earnings multiples in the high teens and low twenties. As a result we aren’t particularly excited about Marsh & McLennan, even considering the insider purchase, and if any peer is worth further research it is Booz Allen Hamilton.
Disclosure: I own no shares of any stocks mentioned in this article.
