Willis Towers Watson Price Target Raised At Citi On Strong Forecasts

Citi analysts have boosted their price objective on Wills Towers Watson PLC WLTW to $148 from $136 pointing out the strong forecasts. The brokerage maintained its Buy rating.

The analysts think margin deterioration, as well as low free cash flow yields were a big driver of legacy stock underperforming in the last five-year period. "We expect both metrics to improve materially over the next few years. We forecast Willis Towers Watson will expand margins by about 1 point per year in 2017 and 2018. Moreover, FCF yield should improve to over 4%, from 1% at legacy Willis during 2015, driven by earnings growth and lower cash taxes paid," the analysts wrote in a note.

The brokerage expects organic growth rates for the brokers to gain from positive exposure growth, increased commission ratios and more reinsurance buying by large carriers. Wills Towers Watson's stock is attractively valued as it trades at a 5 percent discount to its 10-year historical forward P/E.

Citi analysts also expect the valuation to enhance as the company delivered on its long-term margin goal of 25 percent by 2018. Additionally, its $8.90 per share estimate in 2017 is $0.20 higher than consensus, fueled by its for upside from the tax rate.

As far as the Key risks to the story, the brokerage thinks that the risk faced by a broker is an environment where pricing is falling by 10 percent or more, combined with negative GDP growth. Therefore, there is the possibility that the company is treated as a US corporation for federal income tax purposes.