On the Comeback Trail

02/10/2010 11:05 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

George Putnam III, editor of the Turnaround Letter, says a leading insurance broker has survived some tough times and its stock now looks ready to take off.

Tracing its roots back to an insurance firm founded in 1871 after the Great Chicago Fire, Marsh & McLennan Companies (NYSE: MMC) is one of the world’s leading insurance brokers. Through acquisitions over the years, it has also become a major player in reinsurance, management consulting, and risk consulting.

In 2003, Marsh Mac was faced with regulatory and compliance problems at its money management subsidiary (since divested), and just as it was getting those under control, its insurance brokerage arm was accused by former New York Attorney General Eliot Spitzer of bid rigging and other irregularities.

These regulatory issues not only damaged Marsh Mac’s reputation, but also led to turmoil in the executive suite. Then, as the company was beginning to recover from these blows, it was hit by the global economic downturn.

The arrival of new chief executive officer Brian Duperreault, a 30-plus-year veteran of the insurance industry, in early 2008 has stabilized top management and appears to have gotten the company back on track. New leadership was also installed at several operating divisions at about the same time.

Under Duperreault’s leadership, the company has been able to turn around the fortunes of its Marsh insurance brokerage division. By cutting costs, simplifying the organization, and being more client-focused, the brokerage business has returned to profitable growth. Other divisions, while in less drastic need of reform, have improved their performance as well.

Over the last couple of years, Marsh Mac has sharpened its strategic focus by divesting some business lines and bolstering others through acquisitions. While the global slowdown has hurt Marsh Mac’s revenue, it has also provided some good acquisition opportunities.

Finances look reasonably solid. Although there is a moderate amount of debt on the balance sheet, it should be manageable because the company generates strong cash flow and has low capital requirements.

We believe that the combination of Marsh Mac’s past regulatory issues plus the global slowdown in business spending gives you the opportunity to buy one of the world’s leading professional services firms at a very cheap price. The stock sports an attractive 3.7% dividend yield, which should be sustainable.

As the economy recovers and memories of the troubles fade, the stock should appreciate significantly. We recommend buying Marsh & McLennan up to $30. (The stock closed above $22 Tuesday—Editor.)

Disclosure: Certain affiliates of the publisher own Marsh & McLennan stock.

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