Arthur J Gallagher & Co Valuation – April 2018 $AJG

Company Profile (excerpt from Reuters): Arthur J. Gallagher & Co., incorporated on March 30, 1972, 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. As of December 31, 2016, the Company operated primarily as a retail commercial property and casualty broker throughout more than 35 locations in Australia, 35 locations in Canada and 25 locations in New Zealand. As of December 31, 2016, in the United Kingdom, the Company operated as a retail broker from approximately 100 locations. The Company also has an underwriting operation for clients to access Lloyd’s of London and other international insurance markets, and a program operation offering risk management products and services to the United Kingdom public entities. In Bermuda, the Company acts principally as a wholesaler for clients looking to access the Bermuda insurance markets and also provides services relating to the formation and management of offshore captive insurance companies. As of December 31, 2016, through its global network of correspondent insurance brokers and consultants, the Company served its clients’ coverage and serviced needs in more than 150 countries around the world.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AJG – April 2018

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 $12,785,080,466 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.05 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 96.92% Pass
6. Moderate PEmg Ratio PEmg < 20 26.18 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.16 Fail
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 1.05 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 10.42 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 $2.70
MG Growth Estimate 7.41%
MG Value $62.91
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $39.11
MG Value based on 0% Growth $22.93
Market Implied Growth Rate 8.84%
Current Price $70.62
% of Intrinsic Value 112.26%

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 and PB ratios. 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 Overvalued after growing its EPSmg (normalized earnings) from $1.81 in 2014 to an estimated $2.7 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 8.84% 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 below the price.

At the time of valuation, further research into Arthur J Gallagher & Co revealed the company was trading above its Graham Number of $41.96. The company pays a dividend of $1.56 per share, for a yield of 2.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 26.18, which was above the industry average of 22.6. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-19.73.

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) -$19.73
Graham Number $41.96
PEmg 26.18
Current Ratio 1.05
PB Ratio 3.16
Current Dividend $1.56
Dividend Yield 2.21%
Number of Consecutive Years of Dividend Growth 7

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Total Current Assets $5,170,600,000
Total Current Liabilities $4,912,300,000
Long-Term Debt $2,691,900,000
Total Assets $12,897,400,000
Intangible Assets $5,842,500,000
Total Liabilities $8,792,200,000
Shares Outstanding (Diluted Average) 183,600,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.45
Dec2017 $2.54
Dec2016 $2.32
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.70
Dec2017 $2.28
Dec2016 $2.10
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

Recommended Reading:

Other ModernGraham posts about the company

Arthur J Gallagher & Co Valuation – December 2016 $AJG
Arthur J Gallagher & Company Analysis – Initial Coverage $AJG

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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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