Technology

Willis Towers Watson (WLTW) Down 2.8% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Willis Towers Watson (WLTW). Shares have lost about 2.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Willis Towers Watson due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Willis Towers Q2 Earnings & Revenues Beat Estimates

Willis Towers Watson delivered second-quarter 2020 adjusted earnings of $1.80 per share, which beat the Zacks Consensus Estimate of $1.62 by 11.1%. The bottom line improved 1.1% year over year.

The company witnessed solid constant currency revenue growth, which was offset by soft performance of Human Capital and Benefits (HCB) segment.

Operational Update

Willis Towers Watson posted adjusted consolidated revenues of $2.1 billion, up 3.2% year over year on a reported basis. Revenues increased 5% on a constant currency basis but remained flat on an organic basis. Moreover, the top line beat the Zacks Consensus Estimate by 3.2%.

Total cost of providing services increased 4.2% year over year to $1.9 billion due to higher salaries and benefits, depreciation, transaction and integration expenses.

Adjusted operating income was $296 million, down 1% year over year. Margin decreased 60 basis points (bps) to 14% due to lower margin at HCB segment.

Adjusted EBITDA was $441 million, up 3.8% year over year. Adjusted EBITDA margin was 20.9%, up 10 basis points (bps).

Quarterly Segment Update

Human Capital & Benefits: Total revenues of $767 million decreased 4% year over year (down 2% in both constant currency and organic basis). On an organic basis, the global impact of COVID-19 negatively impacted demand in the Talent and Rewards business, resulting in the decline of revenues. Operating margin was 20.9%, reflecting a decrease of 20 bps.

Corporate Risk & Broking: Total revenues of $701 million improved 2% year over year (up 4% in both constant currency and organic basis). On an organic basis, North America continued to lead the segment, followed by International and Western Europe, primarily with new business generation along with strong renewals. The revenue increase was partially offset by a decline in Great Britain, which was primarily due to the impact of COVID-19 on certain insurance lines. Operating margin was 19.2% in the quarter under review, up 400 bps.

Investment, Risk & Reinsurance: Total revenues of $413 million increased 1% from the prior-year quarter (up 2% in both constant currency and organic basis). On an organic basis, most lines of business contributed to the growth. Operating margin was 28.7%, up 180 bps.

Benefits Delivery & Administration: Total revenues of $209 million improved 66% (up 66% in constant currency and down 3% in organic basis). The increase was driven by the acquired company, TRANZACT, which generated revenues of $87 million. Operating margin was negative 4.2% compared with negative 20.1% in the year-ago quarter.

Financial Update

Cash and cash equivalents were $1.1 billion at second-quarter end, up 22.5% from the 2019-end level.

Long-term debt decreased 4.4% to nearly $5.1 billion at quarter-end from 2019 end.

Shareholders’ equity increased 0.8% from the level on Dec 31, 2019 to $10.3 billion as of Jun 30, 2020.

Cash flow from operations was $685 million in the first half of 2020, up 126% year over year. Free cash flow in the first half of 2020 was $550 million, reflecting a surge of 201% year over year.

During the six months ended Jun 30, 2020, the company did not engage in share repurchase activity.

2020 Guidance

Due to the uncertainties caused by the COVID-19 pandemic, Willis Towers Watson had previously withdrawn its full-year 2020 guidance.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

Currently, Willis Towers Watson has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Willis Towers Watson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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