Why Is Arthur J. Gallagher (AJG) Up 20.1% Since Last Earnings Report?

A month has gone by since the last earnings report for Arthur J. Gallagher (AJG). Shares have added about 20.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Arthur J. Gallagher due for a pullback? Before we dive into how investors and analysts have reacted as 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 (AJG) Q1 Earnings Top, Revenues Fall Y/Y

Arthur J. Gallagher reported first-quarter 2020 adjusted net earnings of $1.83 per share, which beat the Zacks Consensus Estimate by 5.2%. Moreover, the bottom line increased 12.3% on a year-over-year basis.

The company’s performance was driven by higher adjusted revenues across Brokerage and Risk Management segments.

Operational Update

Total revenues were $1.8 billion, down 2.9% year over year.

Arthur J. Gallagher’s total expenses increased 9.5% year over year to $1.5 billion in the reported quarter. Higher compensation, reimbursements, interest, and amortization costs resulted in this escalation.

Adjusted earnings before interest, tax, depreciation and amortization and change (EBITDAC) in estimated acquisition earnout payables increased 3.1% from the prior-year quarter.

Segmental Results

Brokerage: Revenues of $1.4 billion increased 9.5% year over year on higher fees, and commission, supplemental and contingent revenues.

Expenses jumped 5.7% from the year-ago quarter.

Adjusted EBITDAC climbed 5.8% from the year-ago level to $495.5 million and margin contracted 120 basis points (bps).

Risk Management: Revenues were up 5.5% year over year to $211.8 million, mainly owing to higher fees.

Expenses rose 4.4% from the prior-year period to $223.9 million.

Adjusted EBITDAC improved 2.9% year over year to $35.3 million but margin contracted 10 bps.

Corporate: Total revenues of $181.8 million were down 51.2% year over year due to lower revenues from consolidated clean coal facilities and lower royalty income from clean coal licenses.

EBITDAC was a negative $23 million compared with a negative $65.4 million in the year- ago quarter.

Financial Update

As of Mar 31, 2020, total assets were $20.8 billion, up 6.1% from the 2019-end level.

At the end of the quarter, cash and cash equivalents of $2633.2 million increased 0.4% from the 2019-end level.

As of Mar 31, 2020, shareholders’ equity decreased 2.8% to $5.1 billion from the level on Dec 31, 2018.

Dividend Update

The board of directors approved a quarterly cash dividend of 45 cents per share. The dividend will be paid out on Jun 19, 2020 to shareholders of record on Jun 5.

Acquisition Update

In the quarter, the company closed eight acquisitions with estimated annualized revenues of about $124.2 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -6.23% due to these changes.

VGM Scores

Currently, Arthur J. Gallagher has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Arthur J. Gallagher has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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