Reentry Into Reinsurance Market With Bain Capital Will Diversify Future Earnings

Key Takeaways

• The strategic completion has set WTW up for future growth and higher profitability, benefiting revenue and net margins.
  
• Investments in talent, innovation, and a new reinsurance JV could boost revenue growth, margins, and earnings diversification.
  
• Divestiture losses, forex pressures, and investment in new ventures may strain earnings, while share buybacks could limit future growth investments and revenue enhancement.

Catalysts

Operates as an advisory, broking, and solutions company worldwide.

• The completion of WTW’s 3-year Grow, Simplify, and Transform strategic priorities has positioned the company for faster growth and increased profitability, likely impacting revenue and net margins favorably in the future.
  
• Strategic investments in talent and innovation, along with enhanced efficiency from the transformation program, are expected to drive incremental revenue growth and margin expansion.
  
• The divestiture of TRANZACT is anticipated to improve growth rates, operating margins, and free cash flow starting in 2025, positively affecting earnings.
  
• The reentry into the reinsurance market through a joint venture with Bain Capital could provide opportunities for revenue growth and diversification in earnings.
  
• An emphasis on specialization and geographic expansion in high-growth areas is expected to contribute to sustained revenue growth and potential margin improvements.

Willis Towers Watson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Willis Towers Watson's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.0% today to 16.9% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $22.88) by about March 2028, up from $-98.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.5x on those 2028 earnings, up from -340.8x today. This future PE is greater than the current PE for the US Insurance industry at 13.9x.
• Analysts expect the number of shares outstanding to decline by 2.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.06%, as per the Simply Wall St company report.

Willis Towers Watson Future Earnings Per Share Growth

Risks

• The divestiture of TRANZACT resulted in a significant pretax loss and related impairment charges of over $1 billion, which may impact future profitability and financial stability. (Impact: Earnings)
  
• The future free cash flow margin reflects capitalized software costs, potentially reducing the available cash for reinvestment or returns to shareholders. (Impact: Free Cash Flow)
  
• Foreign exchange fluctuations are expected to create a headwind to adjusted EPS, affecting profitability across different markets. (Impact: Earnings)
  
• The reinsurance joint venture with Bain Capital, described as a start-up venture, may require significant investment over several years before reaching profitability, initially acting as a headwind to earnings. (Impact: Earnings)
  
• Commitment to $1.5 billion in share repurchases, subject to market conditions, may limit the flexibility to invest in organic and inorganic growth opportunities, affecting the ability to enhance future revenue streams. (Impact: Revenue)

Valuation

• The analysts have a consensus price target of $364.583 for Willis Towers Watson based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $408.0, and the most bearish reporting a price target of just $302.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.8 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 7.1%.
• Given the current share price of $334.97, the analyst price target of $364.58 is 8.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.