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Compass Point Believes Arthur J. Gallagher (AJG) Will Take 2016 to Recharge From Years of Large Acquisitions - PT to $51

February 5, 2016 7:44 AM EST
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Price: $247.79 --0%

Rating Summary:
    14 Buy, 9 Hold, 3 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 12 | Down: 10 | New: 10
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Compass Point maintained a Buy rating on Arthur J. Gallagher (NYSE: AJG), and cut the price target to $51.00 (from $55.00), accounting for slower commission growth expectations. AJG reported 4Q adjusted EPS of $0.59 versus the consensus estimate of $0.55. Compass Point believes that the company will take 2016 to recharge their business by focusing on smaller tuck-in acquisitions and stabilizing core margins following a few years of large acquisitions and their associated integration costs.

Analyst Ken Billingsley commented, "We maintain our Buy rating while lowering our price target to $51 from $55 to account for slower commission growth expectations. The company appears to be willing to take 2016 and recharge their business by focusing on smaller tuck-in acquisitions and stabilizing core margins following a few years of large acquisitions and their associated integration costs. Premium rates in the market continue to weaken thus impacting future commissions for the industry. We expect the company to recharge so they can take advantage of weaker competitors that don’t have the scale and resources to service their customers. AJG appears to be paying a premium (at least for AJG) for recent acquisitions, but if the broker market gets strained due to a contracting commission market, we would expect M&A multiples to come down. Overall, expense margins were a little higher in both the Brokerage and Risk Management segments than we had modeled and revenue in Brokerage was a little light. This was offset by higher earnings/tax savings from the clean coal investment. We have lowered our estimates slightly for 2016 and 2017 to account for slower revenue growth and smaller clean coal tax savings guidance by management than we had previously modeled. However, EBDA and EBITDAC margins continue to improve and earnings per employee are growing as well. While there will likely be some multiple compression in the insurance brokerage space due to contracting premiums rates, we believe AJG is positioned to take advantage of others weakness over the next few years."

For an analyst ratings summary and ratings history on Arthur J. Gallagher click here. For more ratings news on Arthur J. Gallagher click here.

Shares of Arthur J. Gallagher closed at $38.68 yesterday.



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