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Takeaway: Stronger 2014 results + Stagnant 2015 consensus estimates = Lower 2015 hurdle. May be less upside to the Short in an already crowded trade.

KEY POINTS

  1. 3Q14 SHOWS SIGNS OF IMPROVEMENT: Y/Y declines in both revenues and membership moderated once again in 3Q14, with seasonal attrition improving over last year's levels.  That means WTW is likely heading into 2015 with a potentially higher starting member base, reducing the burden of the winter selling season.  We don't believe it will be enough.
  2. BUT 2015 DETAILS WERE VAGUE: We were expecting management to be more explicit regarding 2015 expectations.  WTW implied the headwind from a lower starting member base will be somewhat lower (from $0.60 to $0.55 prior).  That doesn't mean a whole lot since it's only looking at one side of the equations (starting members).  Management also suggested incremental cost investments of $25M next year, but reiterated its expectation that marketing expenses will remain flat, which we do not believe is a prudent move (see point 4).      
  3. CONSENSUS NOW ASKING FOR LESS: 2014 estimates have crept up to reflect the 3Q14 beat and raise, but 2015 estimates have remained largely unchanged).  In turn, 2015 consensus growth expectation have declined, which means the downside surprise factor on the guidance release has also.  We're still expecting considerable downside: 2015 revenue of $1.31B and EPS of $0.96 vs. Consensus of $1.40B and $1.86, respectively. However, when you couple that with sentiment that is already extremely bearish (Short interest > 40% of the float), there may not be too much more upside left in the Short from here. 
  4. THE BIGGER QUESTION: Is WTW's recent weakness secular? Because if it is, then they're shooting themselves in the foot with its cost-containment initiatives, specifically its plans for flat marketing spend in 2015.  WTW's member acquisitions costs have more than tripled in the last 3 years, which alone would suggest secular pressure (but we admit that is backward looking).  If WTW's issues are secular, then its member acquisition costs will keep climbing, which would mean flat marketing spend = worse winter selling season.  Consensus estimates imply improving member acquisition costs in 2015; we doubt that is likely.  We'll be monitoring our Google Trackers, stay tuned.  

WTW: Debating Whether to Cover - WTW   Member Acquisition Costs 1Q15E

WTW: Debating Whether to Cover - WTW   Selling Seasons 1Q15E

Hesham Shaaban, CFA

@HedgeyeInternet

Thomas Tobin

@HedgeyeHC