Investment Jungle

Investment Jungle reader Teton requested that we have a look at Watson Wyatt Worldwide Inc which trades on the NYSE under the symbol WW. Has Teton found a Rule #1 business in the midst of the current market chaos? Let’s find out!

Company Profile:

From Yahoo Finance

Watson Wyatt Worldwide, Inc. provides human capital and financial management consulting services worldwide. It designs, develops, and implements human resource strategies and programs in five principal practice areas, which include benefits; technology and administration solutions; human capital; investment consulting; and insurance and financial services group.

Market capitalization is $2.09B.

Fundamental Analysis:

The Big Five don’t lie. So let’s have a look and see if this company has a MOAT! One caveat is that I do not have 10 years worth of data for this company.

Starting with the return on invested capital, I can see that it clearly meets the 10% minimum ROIC that Rule #1 investors demand. However, it has been steadily trending downwards from the lofty 45% ROIC in 2000 to the 12%-13% ROIC attained each of the last 2 years. Very sharp decline. The 5 year average ROIC is 16.5%.

Return on equity bears this out as well. It has dropped from 38.12% in 2001 to 13.96% in 2007. The 5 year average ROE is a healthy 20.36% but that has not been achieved in either of the last 2 years.

The equity growth rates have been very erratic over the last 6 years. From a high of 113.23% in 2006 to negative growth rates in 2003 (-4.83%) and 2005 (-5.29%). Of course, averaging these peaks and valleys over the whole period shows a much more consistency. I prefer to see more consistency which makes our estimates that much more reliable.

The 5 year equity growth rate is an amazing 34.15%. The 3 year rate is even better at 42.2%. Last year’s rate drops down to 21.64%.

Earnings per share growth rate has been trending upwards. The 5 year rate is 12.26%. The 3 year rate almost doubles to 21.58%. And last year’s rate was 31.98%.

Sales growth rates were non-existent over a 3 year period (2002 - 2004). The average growth rates look great thanks to a sales growth rate of 72.47% in 2007. That of course skews our averages.

Cash flow growth rates in 2002 and 2004 were negative while the last two years have experienced amazing growth rates of 37.14% and 33.46% respectively.

Overall, I find the Big Five are very erratic. Moving from a large growth rate to a negative growth rate and then back again. I would presume that this stock has a significant amount of volatility to it. Not the kind of stock that I would be looking to hold for the next 10 years.

Stock Analysis:

Although I don’t consider this a Rule #1 stock, let’s see if we can put a sticker price on this company.

Looking at the historical equity growth rate, it is tough to pick a future EPS growth rate. It has been so volatile over the last 6 years. There were 2 negative years and 3 years of 20%+ growth rates. I feel that skews the averages. The analysts have forecast 11%. That seems reasonable so why argue.

For a future P/E, I compared the 5 year average P/E of 15.74 and the current P/E of 17.24. I’ll take the more conservative value of 15.74. That is also lower than the default P/E which is 22 (11% future EPS growth rate x 2).

With this information, my sticker price works out to $31.15. At the current price of $48.61, Mr. Market is demanding a premium of 56.03%!

Here is my Rule #1 analysis of WW.

Here is the 1 year stock price chart:

The last two years have shown excellent growth rates in the Big Five and that is reflected in last year’s stock price chart.

Conclusion:

Is this a Rule #1 stock? I would argue no. Much too erratic from year to year. Would I be comfortable holding this stock for a 10 year period? No.

Full Disclosure: I do not own shares in WW.

Popularity: 97%