SHARES OF MARSH & MCLENNAN gained 3% in mid-day trading following a Barron's article which argued that Wall Street has been unnecessarily slow to forgive the insurance broker for its transgressions.
In " Risky Business? Not So Fast," Barron's senior editor Jacqueline Doherty wrote that though the New York-based firm paid $850 million in 2005 to settle charges it rigged bids and steered contracts to insurers for kickbacks, its shares have still not recovered from the levels they sank to after the accusations became public.
However, while its stock may not have corrected itself, the company now boasts a healthy balance sheet with $1.1 billion of cash, and is expected to generate cash flow of $1.7 billion this year on revenue of $11.1 billion.
Management is also focused on fixing the company's insurance operations, which chipped in 45% of revenue and 42% of operating profits in 2006.
If management can boost operating margins in insurance brokerage from the second quarter's dismal 7% to the high-teens or low-20% rate enjoyed by peers, Marsh & McLennan /zigman2/quotes/208419097/composite MMC -0.63% could earn $2.50 to $3 per share, wrote Doherty. Apply the current price/earnings multiple of 15 times, and the stock could be worth 40 a share, according to John Linehan, manager of the T. Row Price Value Fund /zigman2/quotes/209574122/realtime TRVLX -0.20% , which holds 2.9 million shares.