Arthur J. Gallagher (AJG)

Insurance brokerage firm Arthur J. Gallagher (NYSE:AJG) fell short of the markets revenue expectations in Q3 CY2025, but sales rose 21.2% year on year to $3.37 billion. Its non-GAAP profit of $2.32 per share was 8.5% below analysts’ consensus estimates.

Company Overview

Founded in 1927 and operating in approximately 130 countries through direct operations and correspondent networks, Arthur J. Gallagher (NYSE:AJG) provides insurance brokerage, reinsurance, consulting, and third-party claims settlement services to businesses and individuals worldwide.

The insurance brokerage industry, while influenced by insurance pricing cycles, benefits from durable secular tailwinds as rising risk complexity (climate, data privacy), regulatory scrutiny, and insurance pricing inflation. These increase demand for professional risk-management advice. Brokers operate models that rely on commissions and fees tied to premium volumes and growing contributions from recurring advisory, benefits, and compliance services. Scale is a key advantage, enabling better carrier access, stronger data and benchmarking, and efficient deployment of technology and compliance investments, which in turn supports ongoing industry consolidation. The headwinds are labor intensity and wage inflation for producers, regulatory complexity (this cuts both ways, as you can see), and execution risk when integrating new digital tools into legacy workflows.

Arthur J. Gallagher competes with other major insurance brokers including Marsh McLennan (NYSE:MMC), Aon (NYSE:AON), and Willis Towers Watson (NASDAQ:WTW), as well as with numerous regional and specialty brokers in the fragmented insurance intermediary market.

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $12.98 billion in revenue over the past 12 months, Arthur J. Gallagher is a behemoth in the business services sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices.

As you can see below, Arthur J. Gallagher’s sales grew at an exceptional 14.3% compounded annual growth rate over the last five years. This is a great starting point for our analysis because it shows Arthur J. Gallagher’s demand was higher than many business services companies.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. Arthur J. Gallagher’s annualized revenue growth of 16% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

We can dig further into the company’s revenue dynamics by analyzing its most important segment, Insurance Brokerage. Over the last two years, Arthur J. Gallagher’s Insurance Brokerage revenue (commissions and fees) averaged 16.8% year-on-year growth.

This quarter, Arthur J. Gallagher generated an excellent 21.2% year-on-year revenue growth rate, but its $3.37 billion of revenue fell short of Wall Street’s high expectations.

Looking ahead, sell-side analysts expect revenue to grow 28.9% over the next 12 months, an improvement versus the last two years. This projection is eye-popping for a company of its scale and suggests its newer products and services will catalyze better top-line performance.

Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.

Arthur J. Gallagher has been a well-oiled machine over the last five years. It demonstrated elite profitability for a business services business, boasting an average adjusted operating margin of 23.5%.

Analyzing the trend in its profitability, Arthur J. Gallagher’s adjusted operating margin rose by 7 percentage points over the last five years, as its sales growth gave it immense operating leverage.

In Q3, Arthur J. Gallagher generated an adjusted operating margin profit margin of 21.7%, down 1.5 percentage points year on year. This reduction is quite minuscule and indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Arthur J. Gallagher’s EPS grew at an astounding 18.7% compounded annual growth rate over the last five years, higher than its 14.3% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Arthur J. Gallagher’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Arthur J. Gallagher’s adjusted operating margin declined this quarter but expanded by 7 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Arthur J. Gallagher, its two-year annual EPS growth of 11.1% was lower than its five-year trend. This wasn’t great, but at least the company was successful in other measures of financial health.

In Q3, Arthur J. Gallagher reported adjusted EPS of $2.32, up from $2.26 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term adjusted EPS growth than short-term movements. Over the next 12 months, Wall Street expects Arthur J. Gallagher’s full-year EPS of $10.45 to grow 24.7%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Arthur J. Gallagher has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 18.6% over the last five years.

Taking a step back, we can see that Arthur J. Gallagher’s margin dropped by 4.9 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Arthur J. Gallagher’s free cash flow clocked in at $693.5 million in Q3, equivalent to a 20.6% margin. The company’s cash profitability regressed as it was 11.7 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, leading to short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Arthur J. Gallagher has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.2%, somewhat low compared to the best business services companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Arthur J. Gallagher’s ROIC averaged 2.4 percentage point decreases each year. If its returns keep falling, it could suggest its profitable growth opportunities are drying up. We’ll keep a close eye.

Arthur J. Gallagher reported $1.4 billion of cash and $13.94 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $4.25 billion of EBITDA over the last 12 months, we view Arthur J. Gallagher’s 3.0× net-debt-to-EBITDA ratio as safe. We also see its $213.4 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its revenue missed and its EPS fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock remained flat at $258.24 immediately after reporting.

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Arthur J. Gallagher.

Arthur J. Gallagher is a rock-solid business worth owning. To begin with, its revenue growth was exceptional over the last five years, and its growth over the next 12 months is expected to accelerate. And while its cash profitability fell over the last five years, its scale makes it a trusted partner with negotiating leverage. Additionally, Arthur J. Gallagher’s powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

Arthur J. Gallagher’s P/E ratio based on the next 12 months is 19.8x. Analyzing the business services landscape today, Arthur J. Gallagher’s positive attributes shine bright. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $296.18 on the company (compared to the current share price of $258.24), implying they see 14.7% upside in buying Arthur J. Gallagher in the short term.