Mispriced opportunities are a value investor's stock-in-trade. Maybe the larger investment community is overly worried about growth or scared about hazy competitive threats on the horizon. Or maybe a business has a lot of moving parts and a large number of investors just throw up their hands.
Whatever the case, insurance broker and risk manager Arthur J. Gallagher
Part of the trouble is that fourth-quarter results look pretty messy on the surface. Total revenue rose just 1%, and reported net income was far lower than in the year-ago period. I can already hear those in the growth-and-momentum crowd yelling, "Next!"
But I think you have to look below the surface to get a better sense of what's happening here. First of all, revenue in the "core businesses" actually increased by the mid-single digits. The brokerage business (excluding contingent commissions) experienced a 7% gain, and risk management climbed by 6%.
Second, if you back out charges for the anticipated costs of settling the whole contingent commission mess and some future claims-handling obligations, you get a more favorable view of earnings from continuing operations on the income statement. Performance was still worse than in the year-ago period (down about 15%), but that's not as bad as the reported net income figure would otherwise seem.
While it doesn't seem that Gallagher perpetrated the sorts of abuses that Marsh & McLennan
In the case of Gallagher, though, you have some positive points to fall back on. The company is still the fourth-largest insurance broker, and it's still a necessary business. Gallagher also has a growing risk-management business that's not tied to insurance brokerage. And last but not least, the company pays a good dividend and has a track record of fairly consistent hikes to that payout. So while this isn't a stock for everyone, it might still be a solid performer for patient investors willing to figure out the business.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).