Owing to the soft insurance market and the weakness in the US economy restricting any significant top-line growth, we reiterate our Neutral recommendation on Willis Group Holdings plc (WSH).
Willis Group reported a solid fourth quarter on the heels of higher commissions and fees coupled with lower operating expenses.
Counting in the positives, organic growth in commissions and fees, which form the major component of Willis’ revenue, continue to exceed its peers on an average driven by strong new business production. With solid retention levels and new business growth, we expect the company to increase revenues.
Also, to reduce operating expenses, during 2008, Willis undertook a cost saving initiative. The initiative accrued $34 million of net benefits in 2008, which has grown to a cumulative $150 million by the end of 2010. In 2011, Willis expects cost savings of between $65 million and $85 million and in 2012 and beyond, the company expects cost savings of $90 million-$100 million.
Willis has produced a stable cash flow for the past several years. This trend has enabled the company to continue paying dividends.
However, total expense of Willis has been increasing every year. Total expense increased 1% in 2010 largely due to an increase in salaries and benefits driven by higher incentive compensation. Willis expects salary and benefits expense will increase by $100 million in 2011.
To add to its woes, the company has been experiencing a decline in investment income over the past few years, a trend that continued through 2010, due to lower average interest rates. We expect investment income to remain under pressure in the near term as interest rates have continued to experience sharp declines across the globe.
Over the last 7 days and 30 days, none of the analyst covering the stock revised their estimate for the first quarter of 2011. However, over the last 30 days, 1 out of 13 analysts covering the stock lowered the estimate. Over the last 7 days none of the analysts covering the stock revised the estimates for 2011 and 2012.
Over the last 30 days, 3 out of 14 analysts covering the stock raised the estimate for 2011 while 1 analyst nudged the estimate downward. Also, over the last 30 days, 2 out of 14 analysts covering the stock raised the estimate for 2011 while 2 analysts lowered the same.
The Zacks Consensus Estimate for first-quarter 2011 is $1.22 per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $2.82 per share and $3.29 per share.
We maintain a “Neutral” recommendation on Willis over the long term. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
Headquartered in London, United Kingdom, Willis Group Holdings plc and its subsidiaries provide a broad range of insurance brokerage, reinsurance and risk management consulting services to its worldwide clients, both directly and through its associates. Its major competitors are Arthur J Gallagher & Co. (AJG), Aon Corporation (AON) and Marsh & McLennan Companies Inc. (MMC).
GALLAGHER ARTHU (AJG): Free Stock Analysis Report
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MARSH &MCLENNAN (MMC): Free Stock Analysis Report
WILLIS GP HLDGS (WSH): Free Stock Analysis Report
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