- This article explores whether Arthur J. Gallagher may be starting to look like better value after a recent share price weakness, by examining what the current price might be implying and how that compares with its fundamentals.
- The stock last closed at US$207.10, reflecting declines of 3.6% over 7 days, 9.2% over 30 days, 19.1% year to date, and 38.6% over 1 year, compared with gains of 11.3% over 3 years and 72.4% over 5 years.
- Recent coverage has focused on Arthur J. Gallagher's position in the insurance sector and how investors may be reassessing risk and growth expectations in that context. These headlines provide useful background for understanding how the share price has moved over the past year.
- The company currently has a valuation score of 3 out of 6 based on checks of where it appears undervalued. Next is a closer look at traditional valuation methods and, finally, a different way of thinking about value that brings these pieces together.
Find out why Arthur J. Gallagher's -38.6% return over the last year is lagging behind its peers.
Approach 1: Arthur J. Gallagher Excess Returns Analysis
The Excess Returns model looks at how much value a company can create over and above the return that shareholders require. It starts with the equity invested in the business, estimates the earnings that equity can support, and then compares those earnings with the cost of that equity.
For Arthur J. Gallagher, the model uses a Book Value of $90.74 per share and a Stable EPS of $15.98 per share, based on weighted future Return on Equity estimates from 4 analysts. The Average Return on Equity used in the model is 14.39%, while the Cost of Equity is $7.75 per share. That leaves an Excess Return of $8.23 per share, which is the value created above the required return.
The Stable Book Value is set at $111.02 per share, sourced from weighted future Book Value estimates from 2 analysts. Combining these inputs, the Excess Returns model arrives at an estimated intrinsic value of about $341.77 per share, which implies a 39.4% discount to the recent share price of US$207.10.
Result: UNDERVALUED
Our Excess Returns analysis suggests Arthur J. Gallagher is undervalued by 39.4%. Track this in your watchlist or portfolio, or discover 62 more high quality undervalued stocks.
Approach 2: Arthur J. Gallagher Price vs Earnings
For a profitable company, the P/E ratio is a straightforward way to think about what you are paying for each dollar of earnings. It is especially useful when earnings are a key driver of value and you want a quick sense of how the market is pricing those earnings today.
What counts as a normal or fair P/E depends on how investors view the company’s growth potential and risk. Higher expected growth and lower perceived risk can justify a higher multiple, while slower growth or higher risk typically point to a lower one.
Arthur J. Gallagher currently trades on a P/E of 35.61x. That sits well above the Insurance industry average of 10.86x and the peer group average of 18.79x. Simply Wall St’s Fair Ratio for Arthur J. Gallagher is 16.92x, which is a proprietary estimate of what the P/E might be given factors such as earnings growth, profit margins, industry, market cap and company specific risks.
This Fair Ratio goes further than simple peer or industry comparisons because it adjusts for the company’s own fundamentals rather than assuming it should trade like the average insurer. Comparing 35.61x to the Fair Ratio of 16.92x points to Arthur J. Gallagher trading at a richer level than this framework would suggest.
Result: OVERVALUED
P/E ratios tell one story, but what if the real opportunity lies elsewhere? Start investing in legacies, not executives. Discover our 20 top founder-led companies.
Upgrade Your Decision Making: Choose your Arthur J. Gallagher Narrative
Earlier it was mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St let you attach a clear story about Arthur J. Gallagher to the numbers by linking your view of its acquisitions, margins and growth to a specific forecast for future revenue, earnings and fair value. You can then compare that fair value with the current share price to see whether your story points to buying, holding or selling. Each Narrative lives on the Community page, updates automatically as new news or earnings arrive, and can accommodate very different views. For example, one investor might build a high growth Narrative with a fair value of $485.74, while another might use a more cautious Narrative with a fair value of $250.00, even though both are looking at the same ticker, NYSE:AJG.
Do you think there's more to the story for Arthur J. Gallagher? Head over to our Community to see what others are saying!
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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