Brown & Brown Stock Is Believed To Be Fairly Valued

GuruFocus.com
·4 min read

- By GF Value

The stock of Brown & Brown (NYSE:BRO, 30-year Financials) shows every sign of being fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $46.68 per share and the market cap of $13.2 billion, Brown & Brown stock is believed to be fairly valued. GF Value for Brown & Brown is shown in the chart below.


Brown & Brown Stock Is Believed To Be Fairly Valued
Brown & Brown Stock Is Believed To Be Fairly Valued

Because Brown & Brown is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 12.2% over the past three years and is estimated to grow 9.89% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Brown & Brown has a cash-to-debt ratio of 0.36, which ranks worse than 84% of the companies in Insurance industry. Based on this, GuruFocus ranks Brown & Brown's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Brown & Brown over the past years:

Brown & Brown Stock Is Believed To Be Fairly Valued
Brown & Brown Stock Is Believed To Be Fairly Valued

Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Brown & Brown has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $2.6 billion and earnings of $1.69 a share. Its operating margin of 25.88% better than 87% of the companies in Insurance industry. Overall, GuruFocus ranks Brown & Brown's profitability as strong. This is the revenue and net income of Brown & Brown over the past years:

Brown & Brown Stock Is Believed To Be Fairly Valued
Brown & Brown Stock Is Believed To Be Fairly Valued

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Brown & Brown is 12.2%, which ranks better than 79% of the companies in Insurance industry. The 3-year average EBITDA growth is 11.3%, which ranks better than 68% of the companies in Insurance industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Brown & Brown's return on invested capital is 8.32, and its cost of capital is 5.11. The historical ROIC vs WACC comparison of Brown & Brown is shown below:

Brown & Brown Stock Is Believed To Be Fairly Valued
Brown & Brown Stock Is Believed To Be Fairly Valued

To conclude, the stock of Brown & Brown (NYSE:BRO, 30-year Financials) shows every sign of being fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 68% of the companies in Insurance industry. To learn more about Brown & Brown stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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