Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – July 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Arthur J Gallagher & Company (AJG) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Arthur J. Gallagher & Co. is engaged in providing insurance brokerage and consulting services and third-party claims settlement and administration services to entities in the United States and abroad. The Company’s brokers, agents and administrators act as intermediaries between insurers and their customers. The Company operates in three segments: brokerage, risk management and corporate. The brokerage segment comprises of retail and wholesale insurance brokerage operations. The risk management segment provides contract claim settlement and administration services for enterprises and for insurance companies. The corporate segment reports the financial information related to its debt, clean energy investments, external acquisition-related expenses and other corporate costs.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of AJG – August 2015
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor | |||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | Fail | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Pass | |
| 4. Dividend Record | Dividend Payments for 10 years prior | Pass | |
| 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | Pass | |
| Score | |||
| Enterprising Investor | |||
| 1. Sufficiently Strong Financial Condition | Current Ratio > 1.5 | Fail | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | Fail | |
| 3. Earnings Stability | Positive EPS for 5 years prior | Pass | |
| 4. Dividend Record | Currently Pays Dividend | Pass | |
| 5. Earnings Growth | EPSmg greater than 5 years ago | Pass |
Stage 2: Determination of Intrinsic Value
| EPSmg | 1.97 |
| MG Growth Estimate | 7.23% |
| MG Value | $45.27 |
| Opinion | Fairly valued |
| MG Value based on 3% Growth | $28.58 |
| MG Value based on 0% Growth | $16.76 |
| Market Implied Growth Rate | 7.86% |
| Current Price | $47.74 |
| % of Intrinsic Value | 105.45% |
Arthur J Gallagher & Company is not suitable for the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, and the high PEmg ratio.  The Enterprising Investor is concerned with the level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.33 in 2011 to an estimated $1.97 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 7.86% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Arthur J Gallagher & Company (AJG)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$16.40 |
| PEmg | 24.21 |
| Current Ratio | 1.09 |
| PB Ratio | 2.25 |
| Dividend Yield | 3.06% |
| Number of Consecutive Years of Dividend Growth | 5 |
Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Total Current Assets | $4,261,400,000 |
| Total Current Liabilities | $3,905,400,000 |
| Long-Term Debt | $2,125,000,000 |
| Total Assets | $10,716,100,000 |
| Intangible Assets | $5,330,900,000 |
| Total Liabilities | $7,077,600,000 |
| Outstanding Shares | 171,700,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $2.21 |
| Dec14 | $1.97 |
| Dec13 | $2.06 |
| Dec12 | $1.59 |
| Dec11 | $1.28 |
| Dec10 | $1.66 |
| Dec09 | $1.28 |
| Dec08 | $0.82 |
| Dec07 | $1.43 |
| Dec06 | $1.31 |
| Dec05 | $0.32 |
| Dec04 | $1.99 |
| Dec03 | $1.57 |
| Dec02 | $1.41 |
| Dec01 | $1.39 |
| Dec00 | $1.04 |
| Dec99 | $0.87 |
| Dec98 | $0.77 |
| Dec97 | $0.80 |
| Dec96 | $0.64 |
| Dec95 | $0.61 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $1.97 |
| Dec14 | $1.81 |
| Dec13 | $1.67 |
| Dec12 | $1.43 |
| Dec11 | $1.33 |
| Dec10 | $1.34 |
| Dec09 | $1.13 |
| Dec08 | $1.09 |
| Dec07 | $1.26 |
| Dec06 | $1.22 |
| Dec05 | $1.23 |
| Dec04 | $1.62 |
| Dec03 | $1.37 |
| Dec02 | $1.22 |
| Dec01 | $1.07 |
| Dec00 | $0.88 |
| Dec99 | $0.78 |
Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
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