Shareholders of Arthur J. Gallagher & Co. (NYSE:AJG) will be pleased this week, given that the stock price is up 10% to US$85.38 following its latest first-quarter results. Revenues came up short, as sales of US$1.8b were 10% below what the analysts had predicted. Profits didn't suffer quite so much, with statutory per-share earnings of US$1.79 being coming in 3.8% above what was forecast. The analysts typically update their forecasts at each earnings report, and we can judge from their estimates whether their view of the company has changed or if there are any new concerns to be aware of. We thought readers would find it interesting to see the analysts latest (statutory) post-earnings forecasts for next year.
Taking into account the latest results, Arthur J. Gallagher's eleven analysts currently expect revenues in 2020 to be US$6.76b, approximately in line with the last 12 months. Statutory earnings per share are predicted to rise 8.3% to US$3.94. Before this earnings report, the analysts had been forecasting revenues of US$7.11b and earnings per share (EPS) of US$3.81 in 2020. If anything, the analysts look to have become slightly more optimistic overall; while they decreased their revenue forecasts, EPS predictions increased and ultimately earnings are more important.
There's been no real change to the average price target of US$93.33, with the lower revenue and higher earnings forecasts not expected to meaningfully impact the company's valuation over a longer timeframe. It could also be instructive to look at the range of analyst estimates, to evaluate how different the outlier opinions are from the mean. The most optimistic Arthur J. Gallagher analyst has a price target of US$110 per share, while the most pessimistic values it at US$80.00. Analysts definitely have varying views on the business, but the spread of estimates is not wide enough in our view to suggest that extreme outcomes could await Arthur J. Gallagher shareholders.
Looking at the bigger picture now, one of the ways we can make sense of these forecasts is to see how they measure up against both past performance and industry growth estimates. We would highlight that sales are expected to reverse, with the forecast 1.0% revenue decline a notable change from historical growth of 7.1% over the last five years. By contrast, our data suggests that other companies (with analyst coverage) in the same industry are forecast to see their revenue grow 3.0% annually for the foreseeable future. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Arthur J. Gallagher is expected to lag the wider industry.
The Bottom Line
The biggest takeaway for us is the consensus earnings per share upgrade, which suggests a clear improvement in sentiment around Arthur J. Gallagher's earnings potential next year. Unfortunately, they also downgraded their revenue estimates, and our data indicates revenues are expected to perform worse than the wider industry. Even so, earnings per share are more important to the intrinsic value of the business. Even so, earnings per share are more important to the intrinsic value of the business. The consensus price target held steady at US$93.33, with the latest estimates not enough to have an impact on their price targets.
Following on from that line of thought, we think that the long-term prospects of the business are much more relevant than next year's earnings. We have forecasts for Arthur J. Gallagher going out to 2022, and you can see them free on our platform here.
However, before you get too enthused, we've discovered 3 warning signs for Arthur J. Gallagher that you should be aware of.
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