Marsh McLennan Earnings: Strong Growth Persists in Second Quarter

Narrow-moat Marsh McLennan MMC continued to enjoy strong growth in the second quarter, with revenue up 11% year over year on an organic basis. Both sides of the business are performing well, but brokerage was the biggest driver in the quarter. We appreciate the tailwind Marsh McLennan is currently enjoying but historically the company has produced only modest growth, and we think a return to more normalized growth is inevitable. We think the market is overly focused on near-term prospects, and that the shares are overvalued as a result. While Marsh McLennan is tracking a bit ahead of our full-year expectations, the difference is not enough to materially affect our $145 fair value estimate, which we will maintain.

Revenue for the brokerage business grew 13% year over year on an organic basis. Higher interest rates and stronger fiduciary interest income provided a boost but, excluding this, growth was still very healthy at 10%. We think the company continues to draft off of higher insurance market pricing, although reinsurance appears to be the stronger driver at this point. While this remains a tailwind, this positive situation is unlikely to persist for much longer.

Revenue for the consulting business grew 8% year over year on an organic basis. While growth was not as impressive as the brokerage side, it remains well above what we would consider a normalized level. Oliver Wyman, which tends to be the most volatile quarter to quarter, saw 11% growth. We think that macroeconomic uncertainty tends to be a positive for the consulting business, but if we do tip into recession, this side of the business will likely see the largest negative impact.

Adjusted operating margins improved to 27.7% from 26.7% last year. The improvement came entirely from the brokerage side of the business. The rise in fiduciary interest income positively affected margins, as this revenue falls almost completely to the bottom line.