Arthur J. Gallagher & Co.'s (NYSE:AJG) Popularity With Investors Under Threat
Arthur J. Gallagher & Co.'s (NYSE:AJG) price-to-earnings (or "P/E") ratio of 27.9x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 19x and even P/E's below 10x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Arthur J. Gallagher has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
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How Is Arthur J. Gallagher's Growth Trending?
In order to justify its P/E ratio, Arthur J. Gallagher would need to produce impressive growth in excess of the market.
If we review the last year of earnings growth, the company posted a worthy increase of 3.0%. Pleasingly, EPS has also lifted 33% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 7.5% per annum over the next three years. That's shaping up to be materially lower than the 13% per year growth forecast for the broader market.
With this information, we find it concerning that Arthur J. Gallagher is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
What We Can Learn From Arthur J. Gallagher's P/E?
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Arthur J. Gallagher's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Arthur J. Gallagher that you should be aware of.
If you're unsure about the strength of Arthur J. Gallagher's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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