Towers Watson (NYSE:TW) is not the type of company that attracts the attention of the media covering investments. TW does not sell organic burritos or the latest smartphone. The company is not involved in social networking. But TW is the type of company that should attract the attention of the true value investor.
TW was formed in 2010 by the merger of Towers Perrin and Watson Wyatt Worldwide. Both of the prior companies had long histories of successful business in the areas of consulting and management of business processes such as employee benefits, risk management and talent and rewards. I had been a happy shareholder of Watson Wyatt Worldwide for a number of years prior to the merger. That company had roughly doubled revenue and profits over the 2005-9 period and shareholders had been rewarded with a rough doubling in the stock prior to the 2008-9 market drop.
Since the merger, investors have continued reason to be pleased by progress in the business. The company has reported double-digit increases in annual revenue and adjusted EPS. In its most recent earnings announcement out last week, revenue increased by 11% and adjusted EPS by 22% vs. prior year. Both numbers soundly beat analyst forecasts. The company also issued a strong outlook for 2012 seeing EPS in the range of $5.05-$5.15. That would correspond to a 95% increase in EPS vs. 2011 and a 150% increase vs. 2010 levels. Large mergers often do not live up to promises, but so far this one appears to be working well.
TW reported in it earnings conference call last week that clients are very pleased with the increased depth and breadth of services as a result of the merger. TW describes itself as the largest actuarial company in the U.S., Germany, the Netherlands and Brazil. It also claims to the leader in U.S. healthcare and group benefits consulting. TW is clearly profiting from the current environment that finds many companies seeking to make health benefits more efficient and where Dodd Frank is driving changes in executive compensation. The company also sees increasing M&A activity in areas like P&C insurance as a coming growth opportunity. One possible risk factor is the move from defined retirement benefit plans to defined contribution plans.
TW divides it business into three segments: Benefits (roughly 64% of revs., Risk and Financial Services (21% of revs.) and Talent and Rewards (15% of revs.) In recent quarters revenue from the Benefits sector have been growing at a 5-10% rate, while the other sectors have seen 10%+ growth on average. TW has a diversified client base that includes 84% of the Fortune 100, 76% of FTSE listed companies, and three quarters of the world's top insurance companies according to a recent corporate presentation. The largest client contributes less than 1% of total revenue.
On a geographic split in 2010 , 52% of revenue came from U.S. clients, 22% from UK, 6 from Canada, another 7% from Germany and the Netherlands combined with the remainder from regions like Asia Pacific and the Middle East.
TW has continued to make smaller acquisitions since the merger, acquiring the insurance software and consulting company EMB in Nov 2010, the health and welfare benefits company Aliquant in Dec. 2010 and raising its stake to 51% in the South African actuarial company Fifth Quadrant in 2011. Most recently (Oct. 2011) it purchased WellsCanning a company specializing in investment advice to the insurance industry.
On a valuation basis TW stock is currently selling at about 12.4x projected 2012 EPS and about 1.3x projected 2012 revenue. This is a very modest valuation considering the growth record of TW and its predecessor company.
The balance sheet is very strong with no long-term debt and $560 MM in cash and short-term investments.
The company pays a modest dividend of $0.40/share corresponding to a 0.6% yield. But the dividend was upped by 33% in 2010 and future increases are likely if business growth continues.
TW is not a widely covered company. Yahoo Finance lists only 10 analysts, a small number for a company with a market capitalization of $4.5B. Standard & Poor's does not even cover the stock. I think over time this will change as the business accomplishments of TW become more widely recognized.
Towers Watson is a core holding in accounts managed for Freedom Mountain Investment clients and in my individual accounts. I have added shares since the most recent quarterly earnings announcement.