William Blair & Co. analyst Adam Klauber upgraded Arthur J. Gallagher & Co. to "outperform" from "market perform," saying a shift in the deal funding mix should lead to higher EPS growth for the insurance broker.
Arthur J. Gallagher has historically relied on a mix of debt and equity issuance to fund its "aggressive" deal and dividend strategy. But the company's growing free cash flow may mean that it can significantly reduce the need to make stock and debt issuance, the analyst said. The company's free cash flow already jumped to more than $700 million in 2017 from a range of $300 million to $400 million, and should continue to grow 15% to 20%, Klauber wrote in a March 8 note.
The greater cash availability combined with a favorable macro environment should lift its EPS growth to a range of 15% to 20% from approximately 10% in the last five years, according to Klauber.
The analyst raised his 2018 EPS estimate to $3.64 from from $3.56. His 2019 EPS estimate is $4.15.
