Arthur J. Gallagher Gains 18% YTD: Will The Rally Continue?

Shares of Arthur J. Gallagher & Co. (NYSE:AJG) have rallied 18.4% year to date, outperforming its industry’s increase of 9% and in contrast to the Zacks S&P 500 Composite index’s decline of 1.4%. With a market capitalization of $13.8 billion, average volume of shares traded in the last three months were 1 million.

Reasons Behind the Rally

The company delivered a positive earnings surprise in three of the last four quarters with the average beat being 2.82%.

Earnings in the first nine months increased 30.4% on 14.9% revenue rise. Solid organic growth, sturdy performance across all segments and a strong margin expansion have been aiding outperformance. The company witnessed positive organic growth for 25 straight quarters in both its Brokerage and Risk Management segments.

Return on equity is a profitability measure, identifying how the company can effectively utilize its shareholders’ money. The company’s ROE expanded 190 basis points year over year to 15.9%.

The company has been aggressively pursuing strategic acquisitions to ramp up revenues that are geographically diversified with strong domestic and international operations. Notably, most of the acquisitions in the month so far have been outside the United States.

Arthur J. Gallagher’s leverage ratio of 68.1 betters the industry average of 72.8. Though leverage ratio deteriorated 240 basis points, its interest coverage of 5.1 is higher than the industry average of 4.5, reflecting the company’s ability to service debt uninterruptedly.

Can the Bull Run Continue?

The company evolved from having a small retail presence in Australia, Canada and New Zealand to one of the top five brokers globally

Arthur J. Gallagher derives about one-third of its revenues from international operations. It has been acquiring companies that rea based outside United States. Given the number and size of the non-U.S. acquisitions, the Zacks Rank #2 (Buy) insurance broker expects international contribution to total revenues to increase.

The insurance broker’s inorganic pipeline remains strong with about $500 million of revenues.

Increasing health care costs (particularly in pharmacy costs) and increased regulatory compliance required from employers (like Affordable Care Act) are opening up new business opportunities in the employee benefit consulting business.

A sustained solid operational performance gives the much-needed push to the company’s cash flow.

Baking on solid capital and liquidity position, the company has been increasing its dividend every year. Its dividend currently yields 2.2%, better than the industry average of 1.7%, making it an attractive pick for yield seeking investors.

The stock has a Growth Score of B. Growth Score analyzes the growth prospects of a company. Back-tested results have shown stocks with Growth Score A or B combined with a Zacks Rank #1 (Strong Buy) and #2 are the best investment bets.

The Zacks Consensus Estimate for 2019 earnings per share projects an increase of 12.1% on 10.1% revenues rise. The consensus mark for earnings in 2019 indicates 13.7% improvement on revenue increase of 8.2%. The expected long-term earnings growth rate is 10.9%.

Other Stocks to Consider

Investors interested in insurance industry can also check out stocks like American Equity Willis Towers Watson Public Limited Company (NASDAQ:WLTW) , eHealth, Inc. (NASDAQ:EHTH) and MetLife, Inc. (NYSE:MET) , each sporting a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Willis Towers Watson operates as an advisory, broking, and solutions company worldwide. It came up with average four-quarter beat of 7.13%.

eHealth provides private online health insurance exchange services to individuals, families, and small businesses in the United States and China. It pulled off average four-quarter positive earnings surprise of 29.03%.

MetLife engages in the insurance, annuities, employee benefits, and asset management businesses. The company delivered average four-quarter earnings surprise of 9.67%. The stock carries a Zacks Rank #2.

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