We are more intrigued by the fundamental story at Aon (and poor sentiment) than our rating and the stock upside suggest, but we lack a differentiated view in the short-term (and related conviction). Our target price of $402 implies multiples of 20X and 16X F12M EPS and EV/F12M EBITDA, respectively, and represents a modest discount to our estimate of intrinsic value. We value the company by discounting cash flows assuming a cost of equity of 8.5% and terminal growth rate of ~3.5% (vs. the 8-9% and 3.5-4.5% implied by industry multiples over the past 20 years). The company has traded at 20X and 15X F12M EPS and EV/F12M EBITDA versus ~22X and ~15X, respectively, for the industry over the past 10 years.

Upside risks to our price target include: Economic strength could benefit revenues through higher exposures; insurance rate increases could benefit growth and operating leverage; higher interest rates could lead to higher investment yields , while lower rates could improve borrowing costs; higher insurance industry profitability could benefit commissions whether through profit- or volume-contingent payments; higher acquisition activity could benefit revenue growth and margins, while effective integration of acquisitions could lead to upside in expected benefits; increased non-admitted volumes could benefit wholesale revenues, while decreased volumes benefit retail; and technological/societal change could positively impact operations, demand, expenses, or competitive position. 

Downside risks to our price target include: Economic weakness growth could hinder revenues through lower exposures; insurance rate decreases could hinder growth and operating leverage; lower interest rates could pressure investment yields , while higher rates could raise borrowing cost; lower insurance industry profitability could benefit commissions whether through profit- or volume-contingent payments; lower acquisition activity could benefit revenue growth and margins, while ineffective integration of acquisitions could lead to downside in expected benefits; decreased non-admitted volumes could hinder wholesale revenues, while increased volumes hurt retail; and technological/societal change could adversely impact operations, demand, expenses, or hinder competitive position.