With a daily loss of 3.46% and a 3-month decline of 4.2%, Brown & Brown Inc (BRO, Financial) has captured the attention of investors, particularly in light of its Earnings Per Share (EPS) of $2.63. The pressing question on investors' minds is whether the stock is modestly undervalued at its current price. This article aims to explore Brown & Brown's valuation in depth, providing a clear picture of its market position and potential for future growth.
Company Overview
Brown & Brown Inc (BRO, Financial) is a prominent player in the insurance sector, specializing as an agent and broker in property, casualty, and employee benefits. The company's business model revolves around connecting customers with insurance companies, earning revenue through commissions and direct fees, while avoiding underwriting risk exposure. A significant portion of its revenue stems from its retail segment, offering an array of insurance products and services to both entities and individuals. Brown & Brown's national programs segment contributes roughly a quarter of its revenue, with a focus on professional liability coverage. The company's primary operations are in the United States, with Florida being its largest market.
Comparing the current stock price of $69.47 to the GF Value of $77.57, which suggests the stock's fair value, Brown & Brown Inc presents itself as modestly undervalued. This discrepancy sets the stage for a more comprehensive evaluation of the company's intrinsic value.
Understanding the GF Value
The GF Value is a unique valuation tool that calculates the intrinsic value of a stock. It incorporates historical trading multiples, an adjustment factor based on the company's past performance and growth, and future business performance estimates. When the stock price significantly exceeds the GF Value Line, it may indicate overvaluation and potentially poor future returns. Conversely, a price well below the GF Value Line suggests undervaluation and the possibility of higher future returns.
For Brown & Brown, the GF Value indicates that the stock is modestly undervalued, with a market cap of $19.80 billion. This assessment suggests that long-term returns could outpace the company's business growth, providing an attractive opportunity for investors.
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Financial Strength and Stability
Investing in companies with robust financial strength is crucial to avoid the risk of permanent capital loss. Brown & Brown's cash-to-debt ratio of 0.2 ranks lower than 88.59% of its peers in the Insurance industry, leading to a financial strength rating of 5 out of 10 from GuruFocus, which signifies a fair balance sheet.
Profitability and Growth Prospects
Profitable companies, especially those with a history of consistent profitability, pose lower investment risks. Brown & Brown has maintained profitability for the past decade, with an impressive operating margin of 28.32%, ranking higher than 85.48% of the companies in the Insurance industry. This strong profitability is reflected in GuruFocus's ranking of 9 out of 10 for the company.
Growth is a pivotal factor in a company's valuation, with research showing a close correlation with long-term stock performance. Brown & Brown's 3-year average annual revenue growth of 13.8% outperforms 80.93% of its industry counterparts. The company's EBITDA growth rate of 18.4% further underscores its strong growth prospects.
ROIC vs. WACC: A Measure of Profitability
Comparing a company's Return on Invested Capital (ROIC) with its Weighted Average Cost of Capital (WACC) provides insight into its profitability. Ideally, the ROIC should exceed the WACC. For Brown & Brown, the ROIC stands at 6.98, while the WACC is at 8.6, indicating potential areas for improvement.
Final Assessment
In conclusion, Brown & Brown (BRO, Financial) appears to be modestly undervalued, with a fair financial condition and strong profitability. The company's growth ranks favorably within the Insurance industry, suggesting promising prospects for investors. For a detailed exploration of Brown & Brown's financials, you can view its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
