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Brown & Brown's Strategic Efforts Impress, Rising Costs Ail

Zacks Equity Research
Updated

Brown & Brown, Inc. BRO has successfully catered to the growing and ever-changing demands of clients for years, building a robust product and service portfolio in turn. Retaining this optimism, the Zacks Rank #3 (Hold) insurance broker continues to evolve stronger over time and looks set to repeat the success streak in the near future.

Growth Drivers

Brown & Brown’s growth trajectory remains impressive, primarily driven by organic and inorganic means across all segments. Strategic buyouts coupled with mergers have enabled the company to expand operationally and we expect the insurance broker to continue investing in such initiatives that might accelerate the company’s overall growth.

Interestingly, the company’s strategic efforts led to an increase in commission and fees over the past few years, resulting in substantial revenue growth.

Moreover, the insurance broker has pinned its hopes on the new Core Commercial Program, which is anticipated to generate revenues ranging between $6 million and $8 million in the second half of 2017 along with a net P&L investment of $1-$3 million. Additionally, the company expects revenues to increase in 2018 and range between $15 million and $17 million with the net P&L investment of $2-$4 million. It is important to note that this program is still in the investment phase and is likely to leave an impact on the margins through 2019.

This apart, a robust capital position has helped the company boost shareholder value via dividend increases and share buybacks. These shareholder-friendly moves continue to raise optimism among investors.

Growth Projections: The stock has seen the Zacks Consensus Estimate for current-year earnings per share being pegged at $1.86 on revenues of $1.85 billion. While the top line reflects a year-over-year rise of 4.6%, the bottom line represents an increase of 0.2%. For 2018, the consensus mark for the metric stands at $2.00 on $1.92 billion revenues. While revenues represent a 4.1% improvement, earnings reflect 7.5% growth.

An Outperformer: Shares of Brown & Brown have gained 6.9% quarter to date, outperforming the industry’s 2.3% increase. We expect the company’s sustained operational performance, higher commissions and fees plus a solid capital position to drive the stock higher in the near term.



Attractive Valuation:  Looking at the company’s price-to-book ratio, which is the best multiple for valuing insurers because of large variations in their earnings results from one quarter to the next, valuation looks attractive at the current level. The company has a trailing 12-month P/B ratio of 2.9, falling noticeably below the industry average of 4.4.

Near-Term Headwinds

Escalating expenses, mainly due to higher compensation and operating expenses, continues to restrict the operating margin expansion. Moreover, the company does not expect a turnaround on this front anytime soon. Also, an unfavorable currency impact and an increased financial leverage raise concerns.  

Stocks to Consider

Some better-ranked stocks from the insurance industry are Radian Group Inc. RDN, MetLife, Inc. MET and Prudential Financial, Inc. PRU, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .   

Radian Group offers mortgage and real estate products and services in the United States. The company delivered positive surprises in three of the last four quarters with an average beat of 4.52%.

MetLife offers life insurance, annuities, employee benefits and asset management products in the United States, Japan, Latin America, Asia, Europe and the Middle East. The company delivered positive surprises in all the last four quarters with an average beat of 9.60%.  

Prudential Financial provides insurance, investment management and other financial products and services in the United States and internationally. The company delivered positive surprises in three of the last four quarters with an average beat of 0.16%.

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Radian Group Inc. (RDN) : Free Stock Analysis Report
 
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Zacks Investment Research