Willis Towers Watson (NASDAQ:WTW) reported This autumn 2023 outcomes on February 6, 2023 which beat consensus estimates. The corporate additionally issued sturdy steerage for FY 2024. WTW shares moved larger following the discharge and are actually, as of this writing, up ~8% from the place they had been previous to the discharge.
Regardless of this transfer larger, I consider the inventory stays enticing. WTW trades at a considerable low cost to the broader market, regardless of having development prospects that are inline or higher than the broader market. I additionally view the corporate as having much less cyclical danger than the broader market. Moreover, WTW trades at a reduction to friends regardless of having comparable or higher development prospects.
For these causes, I’m initiating the inventory with a Purchase score.
This autumn FY2023 Outcomes
WTW reported This autumn 2023 Adj. EPS of $7.44 for the quarter, which beat consensus estimates by $0.38 and represents a 18% improve from the identical interval a yr in the past. Income for the quarter got here in at $2.9 billion, up 7% on a year-over-year foundation, which barely missed consensus estimates of $2.8 billion. For FY 2023, WTW reported Adj. EPS of $9.95 which represents an 8% improve from FY 2022 Adj. EPS. Income for FY 2023 got here in at $9.48 billion, which represents a 7% improve from FY 2022 ranges.
Probably the most spectacular a part of the quarterly report was the 180bps improve in Adj. Working margin for This autumn 2023 from the identical interval a yr in the past. This enchancment in margins comes because of a metamorphosis plan the corporate is at present working by to drive effectivity and scale back prices. Advantages from this transformation program are anticipated to proceed in 2024 as the corporate expects to appreciate ~$425 million in whole financial savings, an $88 million improve from the run price financial savings realized since inception of the transformation plan. The ~$425 million estimate represents a rise from prior steerage of $380 million.
Full-Yr 2024 Outlook
WTW expects FY 2024 Adj. EPS of $15.40 – $17.00 which is broadly in keeping with consensus estimates which name for Adj. EPS of $16.40. Consensus estimates have elevated by $0.20 following the report, as consensus estimates had beforehand referred to as for FY 2024 Adj. EPS of $16.25 per share.
The estimated influence of additional price financial savings associated to the corporate’s transformation plan might be seen within the projected Adj. Working Margin enchancment of 50-150 foundation factors.
As proven by the chart beneath, WTW has a stable historical past of beating consensus estimates. Over the previous 16 quarters, WTW has delivered 14 beats. Thus, I might not be shocked to see the corporate ship higher outcomes than its 2024 Monetary Targets recommend.
Defensive Enterprise Mannequin With Strong Progress Prospects
WTW is break up into two separate enterprise segments: Well being, Wealth & Profession and Danger & Broking. The Well being, Wealth, & Profession section presents industrial consulting and advisory companies within the worker advantages, HR, and retirement area. The Danger & Broking enterprise supplies danger recommendation and insurance coverage brokerage companies.
The insurance coverage danger and brokerage enterprise are a reasonably defensive enterprise, as corporations and people typically have to have insurance coverage no matter financial circumstances. Nonetheless, there may be a point of cyclicality to the enterprise, as a slowdown in financial exercise leads to enterprise closures and a few cuts in insurance coverage spending. Equally, the companies supplied by the Well being, Wealth, & Profession advisory enterprise are obligatory for many clients no matter financial circumstances, however demand tends to lower considerably is slower financial environments.
Additional proof for the comparatively defensive nature of WTW’s enterprise might be seen by the truth that the inventory has traditionally exhibited a beta of lower than 1. The inventory has skilled a median beta of 0.8x over the previous decade. Moreover, the corporate skilled little or no unfavourable monetary influence throughout the 2020 COVID-19 recession and solely average earnings drops (however not income) throughout the 2008 monetary disaster.
Along with being pretty defensive in nature, WTW is predicted to realize stable development over the subsequent few years. Consensus estimates name for the corporate to ship 13%, 14.2%, and 11.6% EPS development over the subsequent three years. Income development over the subsequent three years is predicted to be 5.4%, 5.2%, and 4.3% respectively. Thus, the EPS development story is absolutely about margin enchancment and a continued discount within the share depend.
The margin enchancment story is sensible as the corporate is more and more targeted on promoting further companies to present shoppers, as was famous on the Q3 convention name:
Our intense deal with cross-selling and making it easier to do enterprise with us is paying off. Throughout industries and companies, extra shoppers are coming to WTW for a full suite of options. Simply to say just a few from this quarter, we had a software program growth agency transfer its international advantages consulting and brokerage work to WTW and appoint us to assist their worker expertise by our Embark portal and our Interact software program. A significant international monetary company’s easy survey request became a multiyear engagement for us that features supporting the consumer with attracting and retaining expertise and the supply of a completely built-in whole reward resolution utilizing certainly one of our portals. And we leveraged our present pension actuarial and outsourcing relationships with a number one regional well being system into assist for a rollout of main adjustments to their well being and advantages program, which embrace the creation of a brief well being and welfare service heart.
As one of many main suppliers of danger, insurance coverage, and different advisory companies to industrial shoppers, WTW is nicely positioned to profit relative to smaller gamers which are likely to have extra restricted advisory choices.
Enticing Valuation Relative to Broader Market
WTW is at present buying and selling at 16.6x FY 2024 consensus earnings. Comparably, the S&P 500 trades at ~22x consensus FY 2024 earnings. WTW is predicted to develop FY 2024 EPS by 13% which is barely greater than the S&P 500 which is predicted to develop earnings by ~12%. General, I consider WTW has comparable development prospects to the broader market over the long run. Based mostly on this, I consider WTW ought to commerce extra in keeping with the broader market.
Moreover, I consider WTW’s underlying enterprise is much less cyclical than the broader market and thus might even commerce at a premium.
Enticing Valuation Relative to Friends and Historic Norms
WTW is at present buying and selling at a average low cost to its friends, which embrace Aon (AON), Brown & Brown, Inc. (BRO), and Arthur J. Gallagher (AJG). WTW trades at 16.6x FY 2024 EPS. Comparably, AON, BRO, and AJG commerce at 19.4x, 22.7x, and 23.3x consensus FY 2024 EPS, respectively.
Traditionally, as proven by the historic P/E chart beneath, WTW had traded principally in keeping with its peer group and at occasions traded at a modest premium.
Over the subsequent 3 years, WTW is projected to develop EPS at a median price of ~13%. Comparably, AON, BRO, and AJG are anticipated to develop EPS at a median price of 11.4%, 14.5%, and 13.8% respectively. Thus, broadly talking, WTW is predicted to develop EPS roughly in keeping with friends.
Traditionally, WTW has generated a ROIC which is in keeping with AJG and BRO however lower than AON. One purpose why AON has been capable of generate greatest in school ROIC is that it has extra scale than WTW, BRO, or AJG, which results in elevated effectivity.
General, given the similarity between WTW and its friends by way of enterprise and development prospects, I don’t consider there must be a major valuation hole. Based mostly on the typical of AON, BRO, and AJG, I consider WTW might commerce at ~21x FY 2024 EPS.
Traditionally, over the previous 10 years, WTW has traded at a median trailing P/E ratio of 23.4x, which represents a modest premium to the inventory’s present trailing P/E ratio of 20.5x. Thus, I additionally discover WTW’s valuation enticing relative to its historic norms.
General, primarily based on peer valuations and broader market valuations, I believe a stable case might be made that WTW ought to commerce at ~21x FY 2024 consensus EPS, which might put the inventory at $344, a ~26% premium to the present share value. A share value of $344 would indicate a trailing normalized P/E ratio of 23.7x, which is in keeping with historic averages.
Repurchase Program Is A Constructive
WTW has been a really aggressive repurchaser of its personal shares over the previous few years. As proven by the chart beneath, WTW has decreased its share depend by greater than 20% over the previous 3 years.
The corporate accomplished $1 billion of repurchases throughout FY 2023 and at present has one other $1.3 billion remaining on its authorization, which represents ~4.6% of shares excellent primarily based on present costs. On its This autumn earnings name, the corporate stated it expects to repurchase $750 million of inventory in 2024.
I view the buyback as a gorgeous use of money given the truth that I consider the inventory is undervalued at present ranges. Furthermore, I view buybacks favorably as they permit traders to compound their funding on a tax deferred foundation and provides traders extra management on the timing of tax realization vs dividends.
WTW additionally pays a wholesome dividend of $3.36 per share, which quantities to a complete spend of $344 million per yr, which is nicely lower than the anticipated dimension of repurchases for the yr.
Dangers To The Bull Case
One danger to the bullish case on WTW could be a spike in rates of interest. At the moment, WTW has $5.2 billion in whole debt and a Debt to Adj. EBITDA ratio of two.1x. A lot of the corporate’s debt is fastened price in nature, which insulates the corporate from a near-term influence as a consequence of rising charges. Nonetheless, if rates of interest had been to extend over the medium-term, WTW could be compelled to refinance present debt at larger rates of interest, leading to elevated curiosity expense. Given the corporate’s average leverage, I consider such a rise in rates of interest could possibly be managed, although it might end in extra of the corporate’s money move being directed in direction of debt compensation versus share repurchases.
One other key danger to the bullish case on WTW could be a worldwide financial slowdown. Whereas the corporate’s enterprise is much less cyclical than the broader market, it does have average publicity to financial circumstances.
The corporate can be uncovered considerably to financial circumstances outdoors of the U.S. WTW will get ~54% of its income from the U.S. and thus has vital publicity to the remainder of the world. The corporate’s second-largest market is the U.Ok. which accounts for 18% of whole income. 40% of the corporate’s income is generated in currencies apart from the U.S. greenback. Thus, a rising greenback can turn into a near-term headwind by way of earnings vs expectations.
WTW delivered stable Q3 2023 outcomes and supplied sturdy steerage for FY 2024. The inventory has moved larger following the outcomes, however I consider it stays undervalued.
At the moment, WTW is buying and selling at a average low cost to the broader market, friends, and its personal common historic valuation. I do not view this low cost as warranted given the sturdy near-term development prospects for the corporate.
I’m initiating the inventory with a Purchase score and would contemplate downgrading the inventory if the valuation turns into much less enticing.