Marsh & McLennan Companies, Inc. (NYSE:MMC) shares are down more than -0.14% this year and recently increased 0.30% or $0.24 to settle at $81.28. Arthur J. Gallagher & Co. (NYSE:AJG), on the other hand, is up 5.85% year to date as of 02/13/2018. It currently trades at $66.98 and has returned 2.42% during the past week.
Marsh & McLennan Companies, Inc. (NYSE:MMC) and Arthur J. Gallagher & Co. (NYSE:AJG) are the two most active stocks in the Insurance Brokers industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect MMC to grow earnings at a 9.76% annual rate over the next 5 years. Comparatively, AJG is expected to grow at a 14.07% annual rate. All else equal, AJG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 14.42% for Arthur J. Gallagher & Co. (AJG). MMC’s ROI is 18.00% while AJG has a ROI of 8.60%. The interpretation is that MMC’s business generates a higher return on investment than AJG’s.
The value of a stock is simply the present value of its future free cash flows. On a percent-of-sales basis, MMC’s free cash flow was 0% while AJG converted 0% of its revenues into cash flow. This means that, for a given level of sales, MMC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. MMC has a current ratio of 1.40 compared to 1.10 for AJG. This means that MMC can more easily cover its most immediate liabilities over the next twelve months. MMC’s debt-to-equity ratio is 0.78 versus a D/E of 0.74 for AJG. MMC is therefore the more solvent of the two companies, and has lower financial risk.
MMC trades at a forward P/E of 17.02, a P/B of 5.91, and a P/S of 2.97, compared to a forward P/E of 16.89, a P/B of 2.94, and a P/S of 1.95 for AJG. MMC is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. MMC is currently priced at a -11.3% to its one-year price target of 91.63. Comparatively, AJG is -5.3% relative to its price target of 70.73. This suggests that MMC is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for MMC and 2.50 for AJG, which implies that analysts are more bullish on the outlook for AJG.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. MMC has a beta of 0.93 and AJG’s beta is 1.16. MMC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. MMC has a short ratio of 3.04 compared to a short interest of 2.16 for AJG. This implies that the market is currently less bearish on the outlook for AJG.
Arthur J. Gallagher & Co. (NYSE:AJG) beats Marsh & McLennan Companies, Inc. (NYSE:MMC) on a total of 6 of the 14 factors compared between the two stocks. AJG is more profitable and has lower financial risk. In terms of valuation, AJG is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, AJG has better sentiment signals based on short interest.