Arthur J. Gallagher (AJG) Q4 Earnings: Rising Costs To Hurt?

Arthur J. Gallagher & Co. (NYSE:AJG) is slated to report fourth-quarter 2017 results on Jan 25 after the market closes. Last quarter, the company delivered a positive earnings surprise of 3.85%.

Let’s see how things are shaping up for this announcement.

Factors to be Considered This Quarter

Arthur J. Gallagher is likely to witness a noticeable rise in expenses, primarily due to higher compensation and operating expenses. This increase in expenses can restrict operating margin expansion, thereby hurting the company’s overall performance.

Also, with the insurance broker’s slew of strategic buyouts, the company has incurred one cent per share as integration costs in the soon-to-be-reported quarter.

Nonetheless, Arthur J. Gallagher is likely to report bottom-line growth in the fourth quarter, mainly owing to a strong performance by its Brokerage and Risk Management businesses as well as higher revenues. In fact, the Zacks Consensus Estimate for fourth-quarter 2017 earnings is pegged at 75 cents per share, representing a rally of 13.6% from the prior-year quarter.

Additionally, the company anticipates improved organic growth at its Brokerage segment in the period. To top it all, the company expects an impact from forex with a tailwind of about $10 million to its brokerage segment revenues in the fourth quarter.

Employee benefit consulting operations are estimated to have registered organic growth on new business opportunities.

Top-line growth has likely been fueled by organic sales as well as strategic mergers and acquisitions. To that end, the Zacks Consensus Estimate for the fourth quarter of 2017 is $1.5 billion, representing an increase of 7.1% from the prior-year quarter.

Earnings Whispers

Our proven model does not conclusively show that Arthur J. Gallagher is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Arthur J. Gallagher has an Earnings ESP of -1.01%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Zacks Rank: Arthur J. Gallagher holds a Zacks Rank #3, which increases the predictive power of ESP. However, a company needs a positive ESP to be confident about an earnings surprise. Thus, this combination leaves surprise prediction inconclusive.

We caution against all Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Some stocks worth considering from the insurance industry with the right combination of elements to surpass estimates this time around are as follows:

The Progressive Corporation (NYSE:PGR) is set to report fourth-quarter earnings on Jan 24. The stock has an Earnings ESP of +0.52% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

American Financial Group, Inc. (NYSE:AFG) has an Earnings ESP of +1.21% and a Zacks Rank of 2. The company is set to announce fourth-quarter earnings on Jan 31.

CNA Financial Corporation (NYSE:CNA) has an Earnings ESP of +2.75% and is a Zacks Rank of 1. The company is expected to release fourth-quarter earnings on Feb 5.

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