Insurance Stocks

Arthur J Gallagher & Co Valuation – December 2016 $AJG

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 10 Stocks for Using A Benjamin Graham Value Investing Strategy – December 2016.  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 & Co (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 both domestic and international entities. The Company operates through three segments: brokerage, risk management and corporate. The Company provides insurance, brokerage and risk management services to a range of commercial, industrial, institutional and governmental organizations through its operating segments. The Company’s Brokerage segment is engaged in the negotiation and placement of insurance for its clients. The Company’s Risk Management segment is engaged in claims management, information management, risk control consulting services and appraisals in the property/casualty market. The Company’s brokers, agents and administrators act as intermediaries between insurers and their customers.

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AJG – December 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $9,080,099,239 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.96 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 82.15% Pass
6. Moderate PEmg Ratio PEmg < 20 24.03 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.47 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.96 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -11.04 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 $2.12
MG Growth Estimate 7.30%
MG Value $49.07
Opinion Fairly Valued
MG Grade D+
MG Value based on 3% Growth $30.80
MG Value based on 0% Growth $18.05
Market Implied Growth Rate 7.77%
Current Price $51.05
% of Intrinsic Value 104.04%

Arthur J Gallagher & Co does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $1.43 in 2012 to an estimated $2.12 for 2016. This level of demonstrated earnings growth supports the market’s implied estimate of 7.77% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

At the time of valuation, further research into Arthur J Gallagher & Co revealed the company was trading above its Graham Number of $33.45. The company pays a dividend of $1.51 per share, for a yield of 3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 24.03, which was above the industry average of 16.56. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-18.49.

Arthur J Gallagher & Co scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$18.49
Graham Number $33.45
PEmg 24.03
Current Ratio 0.96
PB Ratio 2.47
Current Dividend $1.51
Dividend Yield 2.96%
Number of Consecutive Years of Dividend Growth 6

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2016
Total Current Assets $4,213,700,000
Total Current Liabilities $4,398,900,000
Long-Term Debt $2,044,600,000
Total Assets $11,200,300,000
Intangible Assets $5,392,500,000
Total Liabilities $7,513,800,000
Shares Outstanding (Diluted Average) 178,500,000

Earnings Per Share History

Next Fiscal Year Estimate $2.40
Dec2015 $2.06
Dec2014 $1.97
Dec2013 $2.06
Dec2012 $1.59
Dec2011 $1.28
Dec2010 $1.66
Dec2009 $1.28
Dec2008 $0.82
Dec2007 $1.43
Dec2006 $1.31
Dec2005 $0.32
Dec2004 $1.99
Dec2003 $1.57
Dec2002 $1.41
Dec2001 $1.39
Dec2000 $1.04
Dec1999 $0.87
Dec1998 $0.77
Dec1997 $0.80
Dec1996 $0.64

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.12
Dec2015 $1.92
Dec2014 $1.81
Dec2013 $1.67
Dec2012 $1.43
Dec2011 $1.33
Dec2010 $1.34
Dec2009 $1.13
Dec2008 $1.09
Dec2007 $1.26
Dec2006 $1.22
Dec2005 $1.23
Dec2004 $1.62
Dec2003 $1.37
Dec2002 $1.22
Dec2001 $1.07
Dec2000 $0.88

Recommended Reading:

Other ModernGraham posts about the company

Arthur J Gallagher & Company Analysis – Initial Coverage $AJG

Other ModernGraham posts about related companies

Travelers Companies Inc Valuation – November 2016 $TRV
Allstate Corp Valuation – November 2016 $ALL
Unum Group Valuation – August 2016 $UNM
Principal Financial Group Inc Valuation – August 2016 $PFG
Assurant Inc Valuation – August 2016 $AIZ
American International Group Inc Valuation – August 2016 $AIG
Humana Inc Valuation – August 2016 $HUM
Chubb Limited Valuation – August 2016 $CB
Torchmark Corporation Valuation – August 2016 $TMK
Anthem Inc Valuation – August 2016 $ANTM

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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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