Willis Towers Watson: Solid Growth, but Margin Pressure and Pension Issues Create Headwinds

Willis Towers Watson WTW continued to see solid growth in the second quarter, with overall revenue up 7% year over year on an organic basis. The company continues to enjoy some tailwinds on this front, and growth remains well above our long-term expectations. However, management pointed to some profitability issues going forward, and we think the market is focused on the downward revision in the company’s 2024 earnings per share target. We remain comfortable with our $236 fair value estimate for the narrow-moat company, which we will maintain.

Year-over-year growth for the brokerage business was 6% on an organic basis. This represents a decline sequentially, but growth remains strong relative to our long-term expectations, as the company appears to still be benefiting from harder commercial insurance pricing. Growth in the consulting business was a bit more modest at 5%.

Despite the solid growth, the company saw adjusted operating margins decline to 14.6% from 15.5%. Management pointed to inflationary cost pressures as the main culprit. This puts Willis Towers Watson somewhat at odds with what we’ve seen from peers, and we think the company is struggling through some aftereffects of its attempts to stabilize staffing and restore growth.

In part due to this margin pressure, management lowered its 2024 EPS target materially. The revised guidance lowers the adjusted margin target by 50 basis points. However, the primary driver of the EPS decline relates to lower-than-expected pension income, an issue that does not overly concern us.