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Arthur J. Gallagher (AJG) Up 18% YTD: More Upside Left?

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Shares of Arthur J. Gallagher & Co. (AJG - Free Report) have improved 17.5% year to date, outperforming the industry’s increase of 0.9%. The Finance sector and the Zacks S&P 500 composite declined 11.8% and 16.8%, respectively, in the same time frame. With a market capitalization of $42 billion, the average volume of shares traded in the last three months was about 1 million.

Strong-performing Brokerage and Risk Management segments, strategic buyouts to capitalize on growing market opportunities, effective capital deployment and upbeat guidance continue to drive this Zacks Rank #3 (Hold) insurance broker.

This largest property/casualty third-party claims administrator and the fourth largest insurance broker globally, based on revenues, has a stellar track record of beating estimates in the last 17 quarters. The Zacks Consensus Estimate of this Zacks Rank #3 (Hold) insurance broker for 2022 and 2023 has moved 0.5% and 0.1% north in the past 30 days, reflecting analyst optimism.

AJG has a VGM Score of B. This helps to identify stocks with the most attractive value, growth and momentum.

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Can AJG Retain the Momentum?

The Zacks Consensus Estimate for Arthur J. Gallagher’s 2022 earnings is pegged at $7.77, indicating an increase of 41.8% on 3.5% higher revenues of $8.4 billion. The consensus estimate for 2023 earnings is pegged at $8.64, indicating an increase of 11.2% on 11.1% higher revenues of $9.3 billion.

The long-term earnings growth rate is currently pegged at 10%. It has a Growth Score of B.

AJG’s top line should continue to benefit from a sustained solid operational performance at its Brokerage and Risk Management segments. It estimates organic revenue growth of about 10% in 2022

The company’s focus on lowering costs along with growing the top line is likely to favor margins. AJG expects EBITDAC margin to remain between 18.5% and 19%. In Brokerage, the insurance broker expects an adjusted EBITDAC margin of 34%, while at Risk Management, the adjusted EBITDAC margin is expected to be about 18.5%. AJG expects fourth-quarter margin expansion at Brokerage of 125 basis points and targets around 10 to 20 basis points of margin expansion in 2022. For 2023, AJG expects margin expansion starting around 4% or 50 basis points at 6%.

AJG has an impressive inorganic growth story. The insurance broker has quite a strong pipeline with about $400 million of revenues, associated with almost 50 term sheets, either agreed upon or being prepared. AJG estimates M&A capacity at more than $4 billion by the end of 2023.

Banking on its sturdy operational performance, AJG expects to generate $125 million-$150 million in cash flow in 2022 and more in 2023.

Banking on stable cash flow, Arthur J. Gallagher has increased dividends at a seven-year CAGR (2016-2022) of 3.8%, with dividends currently yielding 1.1%. AJG also has a $1.5 billion share buyback program under its authorization.

Stocks to Consider

Some better-ranked stocks from the property and casualty insurance industry are W.R. Berkley Corporation (WRB - Free Report) , Root, Inc. (ROOT - Free Report) and Kinsale Capital Group, Inc. (KNSL - Free Report) . While W.R. Berkley sports a Zacks Rank #1 (Strong Buy), Root and Kinsale Capital carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The bottom line of W.R. Berkley surpassed estimates in each of the last four quarters, the average being 25.63%. Year to date, the insurer has gained 36.8%.

The Zacks Consensus Estimate for W.R. Berkley’s 2022 and 2023 earnings has moved 5.1% and 2.4% north, respectively, in the past 30 days.

Root delivered a trailing four-quarter average earnings surprise of 22.44%. Year to date, ROOT has lost 86.5%.

The Zacks Consensus Estimate for ROOT’s 2022 and 2023 earnings indicates a respective year-over-year increase of 44.8% and 23.8%.

Kinsale Capital’s earnings surpassed estimates in each of the last four quarters, the average being 15.16%. Year to date, Kinsale Capital has gained 30.8%.

The Zacks Consensus Estimate for KNSL’s 2022 and 2023 earnings implies a respective year-over-year rise of 27.5% and 21.9%.

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