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Bull of the Day: Towers Watson (TW)

Tracey Ryniec

Towers Watson (TW) is primed to cash in on the expansion of health care exchanges. This Zacks Rank #1 (Strong Buy) has been acquiring companies to expand its exchange business, which was already expected to grow by the double digits in fiscal 2014.

Towers Watson is a professional services consulting company that specializes in the management of employee benefits, talent management, rewards and benefit exchanges, aka the health care exchanges. It has 14,000 associates worldwide.

The Liazon Acquisition

On Nov 22, Towers Watson announced it had acquired Liazon Corporation, a privately-held developer of private benefit exchanges for active employees, for $215 million. Liazon, which was founded in 2007, focused on companies with 100 to 10,000 employees, or the small to mid-sized company.

This fills a hole in Towers Watson exchanges business which had focused on larger companies with more than 100,000 employees. Towers Watson expects smaller companies to move to the exchange model faster than the larger companies. It also gives Towers Watson a big entry into the active employee exchange business, instead of the retirees business.

Liazon had 100,000 on its active exchanges. Towers Watson expects to have 40,000 in fiscal 2014. Its combined 140,000 customers already puts it as one of the larger national players in the active exchange business.

The exchange business is changing faster than even those in the business had anticipated. Towers Watson called it a 'transformational time' in the benefits industry.

The acquisition is expected to be dilutive to fiscal 2014 by $0.10 to $0.15. However, the company expects it to be accretive by fiscal 2015, especially in the second half of the year when open enrollments occur.

Full Year Estimates Rise

Despite expectations that the Liazon acquisition will be dilutive to earnings, the fiscal 2014 Zacks Consensus Estimate has still been rising.

It jumped to $5.68 from $5.64 over the last month with one analyst lowering and one raising their estimate in that time period. That is earnings growth of 3.6%.

The analysts are more bullish on fiscal 2015, for obvious reasons, as the acquisition will be accretive that year. The fiscal 2015 Zacks Consensus Estimate jumped to $6.22 from $6.06 in the last 4 weeks with 2 estimates being raised in that time. That is earnings growth of 9.6%.

Shares at New Multi-Year Highs

Investors are excited about the growth in the exchange business. In the 2014 fiscal first quarter, the Exchange Solutions group grew sales by 154%.

But this is the smallest of the company's segments, at just 4% of total revenue. Its Benefits group, which generates more than half of its revenue, saw flat sales in the first quarter.

Still, shares have soared to 5-year highs.

Towers Watson has a forward P/E of 21.2, just slightly higher than the consulting industry which averages 20.9x.

There are ways to play the changes in the health care that go beyond simply buying the insurers. Investors should have the service providers, like Towers Watson, on their short list.

[In full disclosure, the author of this article owns shares of TW.]

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

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