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Arthur J. Gallagher Gains 24% in a Year: What's Driving it?

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Arthur J. Gallagher & Co.’s (AJG - Free Report) share price rally makes the stock an investor favorite. Shares of the company have rallied 24.3% in a year, outperforming its industry's rise of 8% and the Zacks S&P 500 Composite's increase of 19.3%. With a market capitalization of $13.2 billion, average volume of shares traded in the last three months were 0.9 million.



What’s Behind the Upside?

Arthur J. Gallagher delivered a positive earnings surprise in the last four quarters with an average beat of 3.46%.

The company flaunts impressive growth, driven by organic sales and acquisition plus mergers, evolving from a small retail presence in Australia, Canada and New Zealand to one of the top five brokers, globally.

The company has been pursuing acquisition to expand globally and add capabilities to its already compelling portfolio. In its recent endeavor, the company acquired Leystone Insurance & Financial, Inc. to ramp up its employee benefits and retirement consulting services as well as expansion efforts in Canada.  The company’s merger and acquisition pipeline remains strong with about $300 million of revenues.

Also, Arthur J. Gallagher projects an increase in international contribution to total revenues, given the number and size of the non-U.S. buyouts. The company’s international segment accounts for 25% contribution to total revenues.

It expects organic growth in brokerage segment for 2018 to be better than 2017’s level with forex being a tailwind.  The company flaunts a stellar record of organic growth for 25 straight quarters in both its brokerage and risk management segments


Also, the company estimates mid-single digit organic growth and margins to improve in the mid 17% range for 2018 at its risk management segment, banking on a wide array of new product offerings as well as a few specialty mergers in the pipeline. These together should continue to fuel growth for the stock.

Lower tax rate owing to the overhaul in tax policy, which slashed the tax rate to 21% from 25%, lent an additional boost to the company’s bottom line.

Banking on operational excellence, the company hiked its dividend by 4% in the first quarter of 2018, witnessing a three-year CAGR of 3.5%. Arthur J. Gallagher’s dividend currently yields 2.5%, better than the industry average of 1.1%. This also makes the stock a shareholder favorite.

Arthur J. Gallagher’s return on equity — a measure of profitability — is 12%, higher than the industry average of 6.9%. This reflects the company’s prudent usage of its shareholders’ funds.

Arthur J. Gallagher carries a Zacks Rank #3 (Hold). The consensus mark for earnings and revenues translates into a year-over-year improvement for both 2018 and 2019.

Stocks to Consider

Some better-ranked stocks from the insurance industry are The Progressive Corporation (PGR - Free Report) , NMI Holdings Inc. (NMIH - Free Report) and The Navigators Group, Inc. (NAVG - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Progressive Corporation provides personal and commercial auto insurance, residential property insurance and other specialty property-casualty insurance as well as related services, primarily in the United States. The company delivered positive surprises in all the preceding four quarters with an average earnings surprise of 9.19%.    

NMI Holdings provides private mortgage guaranty insurance services in the United States. The company pulled off positive surprises in all the trailing four quarters with an average positive surprise of 29.85%.

Navigators Group underwrites marine, property and casualty plus professional liability insurance products and services in the United States and globally. The company came up with positive surprises in three of the last four quarters with an average beat of 19.54%.   

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