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Here’s Why Arthur J. Gallagher (AJG) is Tailor-Made for You


Arthur J. Gallagher & Co. AJG has built a name for itself by offering a wide range of insurance brokerage, employee benefits, consulting and administration services to a wide range of clients in the United States and worldwide. Apart from being the world’s largest property/casualty third-party claims administrator, the company is the fourth largest insurance broker, globally, on the basis of revenues.

Arthur J. Gallagher has witnessed its estimates moving north over the last 60 days, reflecting analysts’ confidence in the same. The stock has seen the Zacks Consensus Estimate for 2018 and 2019 being revised 6.2% and 6.7% upward to $3.58 and $4.00, respectively, during the period.

Shares of the Zacks Rank #2 (Buy) insurance broker have outperformed the industry, year to date. The stock has rallied 12.6% compared with the industry’s gain of 7.9%.

Let us look at the factors that make Arthur J. Gallagher a viable pick for investors now.

Improving Revenues: Over the past few years, the company has been displaying top-line growth, with its five-year CAGR (2012-2017) of the same coming in at 19.6%. The improvement has been largely driven by improving revenues across the Brokerage, Risk Management as well as Corporate segments.

In fact, the company’s Brokerage segment has been reporting organic growth and adjusted earnings before interest, tax, depreciation and amortization and change in estimated acquisition earnout payables (EBITDAC) margin expansion over the past few years. In addition, the company expects impact from forex to be a tailwind for the brokerage segment revenues in 2018.

Inorganic Growth: Arthur J. Gallagher’s prudent acquisitions bear testimony to its inorganic growth strategy. The insurance broker remains optimistic about its credibility to attract acquisition partners in its typical small tuck-in size at fair prices. In fact, the company has put steam behind its acquisition activity in the retail employee benefits brokerage and wholesale brokerage areas. Its merger and acquisition pipeline remain strong with about $300 million of revenues.

Solid Capital and Liquidity Position: On the back of sustained operational performance, the company has been able to enhance shareholders value consistently for a considerable period of time. Thus, a strong capital position has enabled the company to approve regular dividend payouts and stock repurchases.

Historically, the company boasts a diligent increase in dividends with the metric having witnessed a five-year CAGR (2012-2017) of 2.8%.

Moreover, a strong liquidity position lends support to the company in pursuing strategic initiatives as and when required.

Positive Earnings Surprise History: Arthur J. Gallagher displays an encouraging earnings surprise history, having outpaced the Zacks Consensus Estimate in each of the trailing four quarters with an average beat of 4.2%.

Attractive Valuation: Going by the price to book (P/B) ratio, Arthur J. Gallagher is trading at a trailing 12-month P/B multiple of 3.10x, lower than the industry average of 4.38x. This also compares favorably with the S&P 500 index’s average of 3.92x. The company’s valuation indicates that the stock is relatively undervalued compared with its peers. The stock carries an impressive VGM Score of B. Back tested results have shown that stocks with a VGM Score of A or B combined with a favorable Zacks Rank #1 (Strong Buy) or 2 are the best investment bets.

Other Stocks to Consider

Investors interested in some other top-ranked stocks from the insurance industry can consider Radian Group RDN, CNO Financial Group CNO and American Financial Group AFG, each carrying a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Radian Group offers mortgage and real estate products and services in the United States. The company delivered positive surprises in three of the last four quarters with an average beat of 7.9%.

CNO Financial develops, markets, and administers health insurance, annuity, individual life insurance, and other insurance products for senior and middle-income markets in the United States. The company posted positive surprises in the last four quarters with an average beat of 23.9%.

American Financial provides property and casualty insurance products in the United States. The company pulled off positive surprises in the trailing four quarters with an average beat of 26.3%.

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