Any professionals have an opinion on this stock?

Question

Brown & Brown (BRO)

I have been holding some shares for a few years now with constant increase. They split over a year ago and the stock was stagnant. Now, it has been decreasing. I am far from losing money on this stock but would like some opinions if you know what is happening with this stock.

Thanks!

Answer 1

This is MorningStars analysis of the company:

Analyst Note 04-24-2007

On Monday, insurance broker Brown & Brown BRO reported its first-ever decline in internal revenue (after subtracting contributions from acquisitions), but our fair value estimate is unchanged. The weakness was concentrated in three business segments, including two operations affected by difficulties dealing with public entities in storm-ravaged Florida, Brown's largest market. Brown produced modestly positive internal revenue growth outside its three weakest operations. Excluding an extraordinary investment gain, the firm's pretax margin remained high (nearly 36%).

Brown made 10 acquisitions in the first quarter. Weaker market premium pricing has bolstered the pool of acquisition candidates generally. For the acquisitions Brown executed in the first quarter, employee benefit revenue constituted roughly one half of total acquired revenue, where pricing and margins are holding up well relative to the property and casualty business in general. Brown reports that competition for smaller acquisition candidates has not intensified as it has for publicly held firms, but we still anticipate greater competition for its preferred acquisition candidates down the road.


Thesis 12-04-2006

Brown & Brown's unique sales and service-oriented growth culture yields the insurance brokerage firm a wide moat. However, we think the best returns from Brown's acquisition strategy are in the past. Our fair value estimate is $30 per share.

The key to understanding Brown's superior historical results lies in a vibrant intangible asset. The firm's leaders have sparked an action-oriented sales and service culture. A cheetah is Brown's unofficial corporate symbol, taking the cover of the firm's annual reports. Brown has a poster with a story noting that every day a gazelle has to get up and start running or it will get eaten, while every day a cheetah has to get up and start running or it will starve to death. The moral is that when you get up, you had better start running. One way Brown puts this into practice is by requiring offices to earn 25% operating margins. If they don't, personnel changes typically ensue.

Brown seeks and attracts talented people, employing carrots as well as sticks. The net result is motivated people seeking out and serving their customers. Brown pays agents twice as much for generating new business as for renewing contracts, which motivates them to seek new opportunities. As a further incentive, successful agents are eligible to participate in a long-term stock program for their retirement--one that can add up to almost 20% of their annual salary. These incentives have helped the company's profit margins to expand and to align agents' interests with those of customers as well as shareholders.

Brown's pursuit of rapid earnings growth has included an aggressive acquisition strategy. From 2002 to 2005, Brown purchased more than 100 independent insurance brokerage firms. Revenue of acquired firms provided roughly two thirds of Brown's overall revenue growth in that time frame. We think the firm employs a responsible due-diligence process, but the best returns on this strategy are probably behind it. We expect heightened competition for acquisitions.

Brown's continued success depends on developing new leaders. To this end, management has invested significantly in a proprietary training program designed to inculcate agents with the Brown & Brown culture and to provide a deep bench of future profit-center managers. This initiative should help ensure the propagation of the firm's culture.


Valuation

We now think the best returns from Brown's acquisitions are in the past, and we have reduced our fair value estimate to $30 per share from $32. We assume acquisitions continue to boost revenue, leading to revenue growth averaging 15% through 2010. Brown has been a voracious acquisitor, laying out more than $800 million from 2001 to 2005. In our valuation, we deduct cash paid for expected future acquisitions to arrive at our fair value estimate. Brown will not acquire firms at the recent rapid pace forever, however, and our model builds in fewer acquisitions in the later years of our forecast horizon. Current industry pricing pressures could weigh on margins in the near term, but we expect the cycle to reverse down the road. If we model Brown to evolve without any new acquisitions, our fair value estimate is unchanged. We use a 10.5% cost of equity assumption.

Risk

Brown & Brown presents average risk. An insurance broker does not assume insurance risk, and Brown has a remarkably consistent record of income growth. Still, the firm faces two primary risks. First, heightened competition increases the possibility that Brown could overpay for acquisitions. Second, the firm faces a senior management transition phase, but we think it has managed this and other leadership challenges well.

Answer 2

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Act now before its too late for that.
It would become your first milestone.

Answer 3

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Answer 4

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