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Arthur J. Gallagher (AJG) Up 5.6% Since Earnings Report: Can It Continue?

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About a month has gone by since the last earnings report for Arthur J. Gallagher & Co. (AJG - Free Report) . Shares have added about 5.6% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Arthur J. Gallagher Q3 Earnings Top Estimates, Up Y/Y

Arthur J. Gallagher recently reported third-quarter 2017 adjusted net earnings of 81 cents per share, which beat the Zacks Consensus Estimate by about 3.8%. Also, the bottom line improved 5.2% on a year-over-year basis.

The company’s quarterly performance was driven by solid organic growth, outstanding revenue improvement from the tuck-in mergers and acquisitions (M&A) and a strong margin expansion. The company also witnessed a strong performance across all segments.

Net profit rose 2.9% year over year to 71 cents per share.

Operational Update

Total revenue was $1.6 billion, up 6.9% year over year. This upside was driven by growth in total adjusted revenue in the Brokerage, Risk Management as well as Corporate segments. Revenues top the Zacks Consensus Estimate by 1.8%.

Total commissions and fees earned increased 9.8% year over year to $1.1 billion in the quarter.

Arthur J. Gallagher’s total expense rose 7.2% year over year to $1.5 billion in the quarter. Expenses escalated due to a rise in compensation costs, operating costs, interest expenses, cost of revenues from clean coal activities, plus higher depreciation and amortization expenses as well as a change in estimated acquisition earnout payables.

Earnings before interest, tax, depreciation and amortization and change in estimated acquisition earnout payables (EBITDAC) increased 10.4% to $238.8 million.  

Segment Results

Brokerage: Adjusted revenues of $953.1 million grew 7.9% year over year on higher commissions. Total expense shot up 8.7% year over year to $792.1 million.

Adjusted EBITDAC rose 8.1% to $266.2 million.

Risk Management: Adjusted revenues were up 12.7% year over year to $200.2 million owing to higher fees. Total expenses increased 11.1% year over year to $172.4 million.

Adjusted EBITDAC climbed 19.3% year over year to $35.8 million.

Corporate: Total revenue came in at $430.6 million, up 0.6% year over year. Total expense grew 3.9% year over year to $523.3 million.

EBITDAC was at a loss of $47.2 million, wider than a loss of $38.3 million in the prior-year quarter.

Financial Update

As of Sep 30, 2017, total assets were $12.8 billion, up 11.5% from $11.5 billion at year-end 2016.

Cash and cash equivalents at the end of the quarter increased 3.6% to $564.9 million from year-end 2016.

Shareholders’ equity increased about 14.1% from the 2016-end level to $4.2 billion at the end of the quarter.

Acquisition Update

In the third quarter, the company closed six acquisitions with annualized revenues of over $36.9 million.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter.

VGM Scores

At this time, Arthur J. Gallagher's stock has a nice Growth Score of B. It is doing a bit better on the momentum front with an A. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for growth and to a lesser degree value.

Outlook

While estimates have been broadly trending upward for the stock, the magnitude of these revisions has been net zero. The stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.


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