Investing

Hot Stock: Towers Watson

Cash in on Obamacare

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On Oct. 1, the U.S. healthcare exchange will finally be open for business. The exchange is the corner store of Obamacare. It will allow Americans to find the best individual health insurance plans in their state and the White House expects more than 7 million uninsured citizens to sign up during the first six months.

One company that will see a financial benefit from this exchange is Towers Watson (NYSE: TW), a New York-based global professional services company.  In early August the company signed deal with the Federal government to provide health care-related employee education and enrollment services to part-time and seasonal workers and retirees and dependants.

It’s this deal and the future growth of the company’s health care exchange division that prompted Deutsche Bank analyst Paul Ginocchio to upgrade the stock to a buy this week.

In a Sept. 23 note, Ginocchio explained the reason he changed his rating from a hold to a buy is that he underestimated just how big this division could become in five years.

He thinks that the Exchange Services business’ earnings before interest and taxes could grow to $300 million by fiscal year 2017, or 33% of Towers Watson’s total EBIT. It should even grow further, to $1 billion, by 2020.

In the shorter-term, its risk and financial services division is expected to struggle in 2014, he says, but other parts of the business, such as talent and rewards and benefits are getting stronger.

Ginocchio also likes the reportedly $250 million, Sept. 20 sale of its reinsurance brokerage business. “The market will like the increased focus and stronger balance sheet due to the disposal of reinsurance,” he writes.

The stock is currently trading at $105 a share, with about $25 dollars of that coming from the exchange business. He thinks that division could be worth as much as $50 a share, which is why he now has a $125, 12-month price target on the stock.

There are risks: Slower exchange growth, hiccups during its first year of operation and lower margins than expected, but all signs indicate that growth will be robust. Ginocchio thinks the company can grow earnings by 11% between fiscal years 2013 and 2015.

For those wanting to take advantage of the new health rules, this company is one of your best bets.