Willis Tower Watson: Solid Quarter And Potential Revival Of Reinsurance Deal
Summary
- Earnings of $2.66 beat consensus est's of $1.98.
- Organic revenue up 8%, 4% in constant currency.
- 3 out of 4 business lines grew revenue mid to high single digits.
- Deal to sell reinsurance practice to Arthur Gallagher rumored to be back on.
- Raised dividend to $.80.
The Quarter:
Willis Tower Watson (WLTW) reported a very strong quarter besting strong showings last week by Aon (AON) and Arthur J. Gallagher (AJG). The company had easy compares after underperforming a bit year as they were slow to cut expenses. Adjusted EBITDA was up 26% with margins expanding 350 basis points to 24.4% from 20.9%.
Corporate Risk and Broking [CRB] was the stand out performing business line with 12% revenue growth (8% constant currency) and 370 basis point improvement in operating margin to 22.9%. North America was particularly strong with 13% revenue growth, while Western Europe grew 3%.
The big concern this quarter was impact on loss of talent that competitors like Marsh & McLennan (MMC) picked off during the pending Aon acquisition. The company acknowledged that they lost some people during the time the merger was under consideration but that turnover was not that much different than in 2019. They also called out that hiring was a more difficult challenge during that time, but expect that to be easier going forward. Either way, these quarterly results seem to put those concerns to rest that turnover
Corporate Actions:
On the conference call, CEO John Haley confirmed that company is considering strategic alternatives to Willis Reinsurance. Remember the company had an agreement to sell Willis Re to AJG for $3.6billion. That deal was broken when the Aon merger failed. Rumors started going around the street yesterday that the deal was being rekindled.
Whether company sells Willis Re to AJG or someone else, I think it's fair to assume that they will get a better price than the original $3.6 billion since they are not being forced to sell by regulators. If they sold for anywhere above $3.6billion, that would leave well over $5 billion of cash to potentially return to shareholders.
Haley also confirmed that he still plans on retiring and a search for a replacement CEO is underway. His contract expires at the end of the year and he intends to extend that contract.
Valuation:
I'm raising my eps estimate from $11.75 for 2021 to $13 (not including the break up fee from AON). With the stock at $209 during the conference call, the stock is trading at only 16x eps. In my last article on the company, I pointed out that the company was trading at a pretty big discount to Aon and shouldn't be. That discount has widened now that AON stock has not come off at all from the deal unwind and is trading at close to 23x 2021 eps. AJG is trading at 26x eps.
Aiming low, and putting WLTW at just 20x 2021, still a significant discount to AON and AJG, the stock is worth $260. I'll point out the company can add a dose of self-help on that front with $1.5 billion of buybacks already announced. A sale of Willis Re would further line the company's buyback pockets.
Conclusion:
I believe the bulk of the selling since the AON merger break was arbitrageurs blowing out of their positions. Stock trading volume was down considerably yesterday versus last week indicating the arb selling might be over. These earnings numbers and management's bullish commentary point to a chance for a rebound in the short and intermediate term with a buyback hopefully at least putting a floor under the stock.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of WLTW either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (1)
I do however know the game of DCF and according to this game WTW is probably overvalued and definitely very far away from a bargain. If we use 10% discount rate, which is allegedly what Warren Buffett uses, unless the long-term interest rate is higher than 10%, which has not happened recently.