On Wednesday, Evercore ISI upgraded Willis Towers Watson (NASDAQ:) stock from ‘In Line’ to ‘Outperform’ with a revised price target of $373, up from $357. The company, currently valued at $31.12 billion, has shown resilient growth with revenue increasing 5.58% over the last twelve months. The upgrade reflects a positive outlook on the company’s financial performance and business mix heading into 2025.

The analysts at Evercore ISI believe that Willis Towers Watson is positioned for a continued re-rating following a 14% stock increase in 2024, as free cash flow (FCF) is expected to improve and the company shifts its focus towards Risk & Broking (R&B).

Despite the stock’s re-rating in 2024, Willis Towers Watson’s price-to-earnings (P/E) ratio remains at levels comparable to late 2021 and early 2022. However, the company is now considered to be in a much better position, with a more favorable business mix—45% R&B in 2025 versus 40% in 2021-2022.

The analysts note that Willis Towers Watson trades at a discount relative to its organic growth, primarily due to historically poor FCF conversion. This is expected to show marked improvement in 2025, particularly following the sale of Tranzact and a reduction in restructuring expenses.

Although the market is aware of these improvements, Evercore ISI suggests there is still a valuation disconnect due to the company’s historic FCF issues. InvestingPro analysis shows the company generated $1.29 billion in levered free cash flow over the last twelve months, with a free cash flow yield of 4%.

For deeper insights into WTW’s financial health and detailed metrics, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro.

They anticipate that changes made to incentivize cash flow generation, which began showing promise in the fourth quarter of 2023 and throughout 2024, will carry on into 2025. The analysts’ estimates for FCF are 3-4% above consensus.

There are certain factors that may continue to affect the company in 2025, such as the lagged cash impact of restructuring charges and the tax payment on the reinsurance sale earn-out. Despite these challenges, the conversion is expected to improve and drive further re-rating.

Additionally, the analysts highlight a shift in business mix towards higher margin R&B from Human Capital & Benefits (HWC), which is anticipated to accelerate in 2025. Willis Towers Watson is expected to recapture lost market share, potentially achieving over 6% organic growth as it adds headcount in line with its specialization strategy.

The company’s potential to fund more than $1.5 billion per year in buybacks and a similar amount in mergers and acquisitions could further accelerate this mix shift and possibly lead to an upside in both Evercore ISI’s and consensus earnings per share (EPS) estimates.

The report also touches on the impact of regulatory changes from the new U.S. administration, which are expected to support organic growth in the Health segment, approximately 30% of HWC, in the high single-digit percentage range.

Business Development Outsourcing (BDO) is considered a variable, but the analysts are confident in the 4% consensus growth expectations, citing price escalators in contracts and a one-time client cancellation as factors contributing to a favorable comparison in 2025.

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