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Arthur J. Gallagher (AJG) Up 28.9% in a Year: More Room to Run?

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Zacks Equity Research
·4 min read
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Shares of Arthur J. Gallagher & Co. AJG have gained 28.9% in the past year, outperforming the industry's increase of 3.4%. The Zacks S&P 500 composite has increased 20.4% in the said time frame. With a market capitalization of $23.2 billion, average volume of shares traded in the last three months was 0.8 million.



The rally was largely driven by higher commissions and fees, solid supplemental and contingent revenues, robust capital position as well as prudent capital deployment.

It has a decent earnings surprise history too. Its earnings beat estimates in each of the last four quarters, the average being 15.79%.

Can It Retain the Momentum?

The Zacks Consensus Estimate for 2021 earnings has moved up 0.4% in the past seven days, reflecting analysts’ optimism.

Arthur J. Gallagher’s revenue growth has been improving over the past several years, attributable to solid performance at Brokerage and Risk Management segments.

In the first nine months of 2020, it generated approximately 69% of revenues for the combined brokerage and risk management segments domestically and 31% internationally, primarily in Australia, Bermuda, Canada, the Caribbean, New Zealand and the U.K.

The Brokerage segment accounted for 74% of revenues in the first nine months of 2020.

In the Risk Management segment, the company expects growth in EBITDAC, primarily due to expense savings.

Going forward, higher commissions from underwriting enterprises, higher fees from clients, improved supplemental and contingent revenues from brokerage operations and higher organic revenues are likely to drive the performance of both segments.

As part of its strategic initiatives, the company remains focused on acquisitions to expand into desirable geographic locations, further extend presence in retail and wholesale insurance and reinsurance brokerage services markets and increase the volume of general services currently provided. The insurer’s combined Brokerage and Risk Management revenues grew organically and through mergers and acquisitions.

In 2020, the company completed 28 mergers and acquisitions. Its inorganic pipeline remains strong with revenues of about $350 million associated with 40 term sheets, either agreed upon or being prepared.

The brokerage insurer boasts a solid balance sheet with high liquidity and improving leverage. Its debt to capital of 42.3% betters the industry average of 52.3%. The company has more than $1.6 billion of liquidity and exited the third quarter with $550 million in cash balance. Also, it has access to more than $1 billion under its revolving credit facility.

Banking on its sound capital and liquidity position, this Zacks Rank #3 (Hold) brokerage insurer is engaged in prudent capital deployment. The company raised its dividend at a six-year (2014-2020) CAGR of 3.8% and currently yields 1.5%, which betters the industry average of 1.3%.  It has 7.3 million shares remaining under its repurchase authorization. However, the company did not buy back any shares in 2020.

Despite the rapid contraction of economies of the U.S. and other countries around the world due to COVID-19, the company’s history of strong new business generation, solid retentions and enhanced value-added services for carrier partners should help offset softer economic conditions around the world.

The company is well poised for progress, as is evident from its favorable VGM Score of B. Here V stands for Value, G for Growth and M for Momentum, with the score being a weighted combination of all three factors.

The Zacks Consensus Estimate for 2021 earnings per share is pegged at $4.73, indicating a rise of 2.7% from the year-earlier reported number. The expected long-term earnings growth is pegged at 10.5%. The stock carries an impressive Growth Score of B. Notably, Growth Score analyzes a company’s prospects.

Stocks to Consider

Some better-ranked stocks from the insurance space are Aon plc AON, Brown & Brown, Inc. BRO and Markel Corporation MKL, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Aon surpassed bottom-line estimates in three of the last four quarters. It has a trailing four-quarter earnings surprise of 1.12%, on average.

Brown & Brown surpassed bottom-line estimates in three of the last four quarters. It has a trailing four-quarter earnings surprise of 13.91%, on average.

Markel surpassed bottom-line estimates in three of the last four quarters. It has a trailing four-quarter earnings surprise of 143.46%, on average.

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