Wall Street expects earnings to increase

Wall Street expects year-over-year earnings growth on higher revenues when Arthur J. Gallagher (AJG) reports earnings for the quarter ended March 2023. While this widely known consensus outlook is important in assessing the company’s earnings picture, a powerful factor that may impact a company’s short-term share price is to compare actual results with estimates.

The earnings report, due on April 27, 2023, could help the stock climb higher if these key numbers are better than expected. On the other hand, if they miss, the stock could fall.

While the sustainability of the immediate price movement and future earnings expectations will largely depend on management’s discussion of business conditions during the earnings call, it is worth limiting the likelihood of a positive EPS surprise.

Zacks Consensus Estimate

The insurance and risk management company is expected to post quarterly earnings per share of $3 per share in its upcoming report, representing a year-over-year change of +6.8%.

Revenue is expected to be $2.66 billion, up 10.9% from the year-ago quarter.

Estimate the trend of change

The consensus EPS estimate for the quarter has not changed over the last 30 days. This broadly reflects how analysts covering the data have collectively re-evaluated their initial estimates during this period.

Investors should note that the direction of each analyst’s estimate revisions will not always be reflected in the aggregate change.

Whisper about earnings

Revisions to estimates prior to a company’s earnings release provide an indication of business conditions in the period in which the earnings are expected to be released. This insight is at the heart of our proprietary surprise prediction model, the Zacks Earnings ESP.

The Zacks Earnings ESP compares the Most Accurate Estimates to the Zacks Consensus Estimates for the quarter; The Most Accurate Estimate is a newer revision of the Zacks Consensus EPS estimate. The idea is that analysts reviewing their estimates just before an earnings release have the latest information, which could potentially be more accurate than what they and other consensus participants had previously predicted.

Thus, a positive or negative ESP reading theoretically indicates the likely deviation of actual earnings from consensus estimates. However, the predictive power of the model is only significant for positive ESP readings.

A positive Earnings ESP is a strong predictor of an earnings beat, especially when paired with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Our research shows that stocks in this combination deliver a positive surprise nearly 70% of the time, and a solid Zacks Rank actually increases the predictive power of its Earnings ESP.

Please note that a negative earnings ESP reading does not mean a loss of earnings. Our research shows that it is difficult to predict earnings growth with any degree of confidence for stocks with negative ESP readings and/or a Zacks Rank of 4 (Sell) or 5 (Strong Sell).

How have the numbers changed for Arthur J. Gallagher?

According to Arthur J. Gallagher, the Most Accurate Estimate is lower than the Zacks Consensus Estimate, suggesting that analysts have recently become bearish on the company’s earnings prospects. This resulted in an earnings ESP of -0.33%.

On the other hand, the stock currently sports a Zacks Rank of #4.

So this combination makes it difficult to confidently predict that Arthur J. Gallagher will beat the consensus EPS estimate.

Does the history of surprising results have any clue?

When calculating estimates of a company’s future earnings, analysts often consider how well the company has been able to match previous estimates. So it’s worth taking a look at the surprise history to gauge its impact on the upcoming issue.

For the last reported quarter, Arthur J. Gallagher was expected to post earnings of $1.50 per share when it actually produced earnings of $1.54, delivering a surprise of +2.67%.

The company has beaten consensus EPS estimates four times over the last four quarters.

Bottom line

Improving or lacking earnings may not be the only basis for a stock’s value rising or falling. Many stocks lose value despite good earnings because of other factors that disappoint investors. Similarly, unforeseen catalysts help many stocks gain despite losing profits.

That said, betting on stocks that are expected to exceed earnings expectations increases your chances of success. Therefore, it is worth checking the company’s Earnings Rank and Zacks Rank before their quarterly release. Use our Earnings ESP filter to find the best stocks to buy or sell before they report.

Arthur J. Gallagher doesn’t seem like a compelling candidate to beat earnings. However, investors should also pay attention to other factors if they want to bet on or stay away from these stocks ahead of an earnings release.

Expected results of an industry player

Another stock in the Zacks Insurance industry, Brokerage, Brown & Brown (BRO), is expected to post earnings of $0.81 per share for the quarter ended March 2023. These estimates indicate a year-over-year change of +3.9%. Revenue for the quarter is expected to be $1.06 billion, up 17.4% from the same quarter last year.

Over the last 30 days, the consensus EPS estimate for Brown & Brown has been revised 0.1% to the current level. Nevertheless, the company currently has an Earnings ESP of 1.12%, which reflects a higher most accurate estimate.

This Earnings ESP combined with the Zacks Rank #3 (Hold) suggests that Brown & Brown is likely to exceed the consensus EPS estimate. The company has topped consensus EPS estimates three times over the last four quarters.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

Want the latest recommendations from Zacks Investment Research? Today you can download the top 7 stocks for the next 30 days. Click to get this free report

Arthur J. Gallagher & Co. (AJG): Free stock analysis report

Brown & Brown, Inc. (BRO): Free stock analysis report

To read this article on Zacks.com click here.

Zacks Investment Research