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Why Should Willis Towers (WLTW) Still Be in Your Portfolio?

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On Nov 21, we issued an updated research report on Willis Towers Watson plc (WLTW - Free Report) .

Willis Towers’ third-quarter 2016 adjusted net income beat the Zacks Consensus Estimate as well as improved year over year. With respect to surprise trend, the company has delivered positive surprise in the last three quarters, with an average beat of 9.1%.

Organic growth in commissions and fees, which forms the major component of Willis Towers’ revenues, continues to increase. Strategic acquisitions have fortified the company’s geographical footprint, besides adding capabilities. The merger (of Willis Group and Towers Watson) is projected to generate cost synergies of $100–$125 million and tax savings of approximately $75 million annually, by 2018.

Also, the Operational Improvement Program will help the company meet 25% adjusted EBITDA margin goal by 2018. The company targets $325 million of annual cost savings by the end of 2017.

Willis Towers has continuously focused on improving its liquidity, while maintaining a solid balance sheet (by lowering its debt level and thereby improving its leverage position). The Zacks Rank #3 (Hold) insurance broker has consistently enhanced its shareholder value via dividend hikes and stock buybacks. Recently, the board increased its authorization by $1 billion. The company plans to repurchase $300 million worth shares in 2016.

However, margins remained under pressure as operating expenses have been rising for the last several quarters. The insurance broker expects to incur about $150–175 million in merger and integration-related costs in 2016. In addition, restructuring costs associated with Operational Improvement Program are anticipated to be $440 million in 2014–2017, of which $165 million is estimated in 2016.

Nonetheless, riding on operational strength, Willis Towers expects adjusted earnings per share between $7.60 and $7.80. Reported earnings per share are expected between $2.30 and $2.50 as against the previous estimate of $2.48–$2.68. Constant currency revenue growth is likely to be in the range of 9–10%, while reported revenue growth is estimated at 6%. The long-term expected earnings growth is currently pegged at 9.5%.

Stocks to Consider

Some better-ranked insurers are Alleghany Corp. (Y - Free Report) , First American Financial Corp. (FAF - Free Report) and Arch Capital Group Ltd. (ACGL - Free Report) . Each of these stocks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. .  

Alleghany Corp. deals with property & casualty reinsurance and insurance businesses in the U.S. and internationally. The company delivered positive surprises in three of the last four quarters, with an average beat of 20.52%.

First American Financial, a leading provider of title insurance and settlement services to the real estate and mortgage industries in the U.S., beat estimates in all the trailing four quarters, with an average beat of 14.32%.

Arch Capital offers property, casualty and mortgage insurance and reinsurance products worldwide. It delivered positive surprises in all of the last four quarters, with an average beat of 9.27%.

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