Why Is Brown & Brown (BRO) Up 1.5% Since Last Earnings Report?

It has been about a month since the last earnings report for Brown & Brown (BRO). Shares have added about 1.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Brown & Brown due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Brown & Brown Q3 Earnings & Revenues Beat, Rise Y/Y

Brown & Brown, Inc. reported third-quarter 2018 earnings of 38 cents per share, beating the Zacks Consensus Estimate by 11.7%. Also, the bottom line improved nearly 41% year over year.

The quarter witnessed strong organic revenue growth supported by an increase in commissions and fees. Though expenses increased, the bottom line benefited from low tax incidence.

Behind the Headlines

Adjusted revenues amounted to $530.9 million, outperforming the Zacks Consensus Estimate by 4.6%. Moreover, the top line rose 11.6% year over year, riding on higher commissions and fees plus net investment income. Organic revenue growth was 1.4% in the reported quarter.

Commissions and fees grew 11.6% year over year to $472 million.

Investment income soared 60% year over year to $0.8 million.

Total expenses increased 10.6% to $388.4 million, driven by a rise in employee compensation and benefits as well as other operating expenses.

Net income before interest, income taxes, depreciation, amortization and a change in estimated acquisition earn-out payables (EBITDAC) were $178 million, up 11.8% year over year. EBITDAC margin was flat year over year at 33.5%.

Financial Update

Brown & Brown exited the third quarter with cash and cash equivalents of $724.7 million, down 12.1% from the 2017-end level.

Long-term debt of $832.4 million as of Sep 30, 2018 was down 2.8% from the level at 2017 end.

Net cash provided by operating activities for nine months ending Sep 30, 2018, came in at $355.5 million, up 13.4% from the same period in 2017.

Adoption of New Accounting Standard

On Jan 1, 2018, Brown & Brown adopted FASB Accounting Standards Update No. 2014-09, ‘Revenue from Contracts with Customers (Topic 606)’ and Accounting Standards Codification (Topic 340) — Other Assets and Deferred Cost. This hurt the top line by $24.5 million and the bottom line by 6 cents in the quarter under review.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.06% due to these changes.

VGM Scores

Currently, Brown & Brown has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Brown & Brown has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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