Arthur J. Gallagher: It Just Hit a 61st 52-Week High. More to Come in 2024.

Will Ashworth - Barchart - Tue Mar 12, 2:45PM CDT

As I write this on Tuesday afternoon, NYSE stocks are having a much better day regarding companies hitting 52-week highs and lows.

According to Barchart.com’s data, 83 NYSE stocks hit a 52-week high today, more than four times the number of those hitting 52-week lows. Meanwhile, the Nasdaq has 37 stocks hitting 52-week highs compared to 74 hitting 52-week lows.

At the top of the NYSE stocks hitting a 52-week high is Arthur J. Gallagher (AJG), the Chicago-based insurance broker. Its stock is up 41% over the past year, hitting $254,16 on the day, its 61st 52-week high hit in the past year.

With insurance costs rising, having an insurance industry leader on your side isn’t the worst idea.

Run by a Gallagher family member since its founding in 1927, it continues to be an excellent long-term investment for those looking for consistent capital appreciation.

Here’s why more 52-week highs could be in store for the remainder of 2024.

M&A Continues to Be a Big Part of Gallagher’s Growth

According to the company's March 2024 presentation, Gallagher acquired $885 million in annual revenue in 2023 through 51 tuck-in acquisition opportunities in its Brokerage segment.

M&A is one of the company’s four levers of growth. The others are organic sales growth, maintaining a unique corporate culture that attracts top talent, and increasing productivity and quality.

Over the past five years, it’s never made less than $250 million in annual acquisitions. In 2021, they went over $1 billion, as its presentation states, and domestic and international insurance markets remain highly fragmented. There are more than 16,000 agents and brokers in the U.S. alone.

It will continue to expand through tuck-in acquisitions in the U.S., Canada, the UK, and Australia, where it has the platforms in place to quickly integrate these businesses.

On Feb. 12, it announced the acquisition of The Wright Agency, a UK-based company doing business as Simply Communicate Ltd. The business provides workplace communications consulting services to other firms interested in improving their employees’ internal corporate experience.

These bolt-in acquisitions are classic examples of acquiring talent instead of tangible assets. Like many of its acquisitions, they’re not material to the financials but capable of adding value once integrated under the Gallagher umbrella.

Analysts Are Lukewarm. And That’s Okay.

According to Barchart.com data, three months ago, the 16 analysts covering AJG rated it a Moderate Buy (4.38 out of 5). It’s still a Moderate Buy (4.00 out of 5), but the number of Strong Buys has fallen from 11 to nine.

The mean target price is also slightly below its current share price of $254.55. That’s a sign analysts are concerned about Gallagher’s valuation. It trades at 5.5x revenue and 24.7x forward revenue, both higher than in recent years.

Regardless of its valuation, the company has significantly improved its cost structure over the past 15 years. For example, in 2008, its operating expense ratio -- defined as operating expenses divided by operating income -- for its Brokerage segment was 20.8%. In 2023, it was 730 basis points lower. The operating expense ratio for its Risk Management business has improved by 710 basis points over the past 15 years to 19.9%.

In 2023, its revenue was $9.91 billion, 19% higher than in 2022. Its EBITDAC (earnings before interest, taxes, depreciation, amortization, and the change in estimated acquisition earnout payables) was $3.22 billion, a margin of 32.5%, 50 basis points higher than a year ago.

J. Patrick Gallagher has been CEO of the company since the beginning of 1995. Since becoming CEO, its shares have appreciated by 3,200%, a compound annual growth rate of 12.81%, 410 basis points higher than the S&P 500.

The Bottom Line

You would think that a company run by a Gallagher family member since 1927 would control more of it. That’s not the case. As of the 2023 proxy, Pat Gallagher owned 1.15 million shares (13.2% of his holdings). Gallagher, the directors, and named executive officers control 3.37 million shares or 1.6% of the company.

In the end, the investment by these 21 people amounts to nearly $900 million, which for most people is plenty. Insiders and management have enough vested interest to continue adding value for shareholders.

Besides, when your name is on the door, the desire to be successful is a powerful incentive to work hard. Gallagher’s done that and more.

Unsurprisingly, AJG stock continues to hit 52-week highs in 2024. It’s a long-term winner.

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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.