William Blair analyst Adam Klauber has upgraded Arthur J. Gallagher & Co. to "outperform," writing that the company's accelerating free cash generation should convert into higher EPS growth.
The analyst told investors that the company has historically relied on issuing equity and debt to fuel M&A and pay dividends that are higher than its peers'. However, a wave of free cash generation would substantially reduce reliance on outside funding sources, and "for the first time in recent memory," Arthur J. Gallagher can generate enough free cash to cover the dividend and pursue deals without using stock and debt issuance, the analyst said.
Using cash for deals, coupled with an improving macroeconomic environment, should result in 15% to 20% EPS growth this year, Klauber wrote.
The analyst increased his 2018 EPS estimate to $3.64 from $3.56. His 2019 EPS estimate is $4.15.
