Shares of Brown & Brown Inc. BRO have gained 33.6% year to date, much above that of the Zacks-categorized Insurance Broker industry. This price performance is backed by a positive estimate revision. The company has seen its 2016 and 2017 estimates moving north by more than 1% over the last 60 days.
Brown & Brown recorded impressive growth, driven by impressive organic and inorganic means. Also, improving commission and fees have been driving revenues, which have been growing at a 10-year CAGR of 7.7%.
Moreover, Brown & Brown’s capital deployment activities impress. The company’s latest hike of 11.4% marks the 22nd annual dividend increase and it has share buyback authorization of $375 million remaining under the $400 million that was approved by the board in Jul 2015. Backed by its strong operational performances, Brown & Brown continues to generate solid cash flows to be deployed in strategic initiatives and shareholder-friendly moves. Also, the company has been witnessing improvement in its debt level over the last few quarters.
Brown & Brown has been gaining significant international exposure due to its expanded international operations to the United Kingdom, Hamilton, Bermuda and George Town, Cayman Islands.
The Zacks Rank #3 (Hold) insurance broker surpassed both earnings and revenues estimates in each of the last four quarters.
However, Brown & Brown has been experiencing an increase in expenses due to higher compensation and operating expenses. This in turn has been weighing on margin expansion. Also, introduction of a new long-term stock incentive program in 2016 will lead to non-cash stock-based compensation between $23 million and $26 million in 2016.
Brown & Brown expects net income before interest, income taxes, depreciation, amortization and the change in estimated acquisition earn-out payables (EBITDAC) margin to contract in the next few quarters due to the additional investments made. The company estimates the impact from technology investments to be between 30 basis points (bps) and 40 bps in the fourth quarter and between 35 bps and 50 bps in 2017. Nonetheless, the company envisions margins between 33% and 35% over the long term.
Despite these challenges, the expected long-term earnings growth for the company is pegged at 9%. Price earnings growth ratio, which determines the relative trade-off between the price of a stock, the earnings generated per share, and the company's expected growth, is 2.62 compared with the industry average of 2.05.
Stocks to Consider
Some better-ranked insurers are Alleghany Corporation Y, First American Financial Corporation FAF and Arch Capital Group Ltd. ACGL. Each of these stocks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Alleghany Corporation deals with property & casualty reinsurance and insurance businesses in the U.S. and internationally. The company delivered positive surprises in three of the last four quarters, with an average beat of 20.52%.
First American Financial is a leading provider of title insurance and settlement services to the real estate and mortgage industries in the U.S. It outpaced estimates in all the trailing four quarters with an average beat of 14.32%.
Arch Capital offers property, casualty, and mortgage insurance and reinsurance products worldwide. It delivered positive surprises in all of the last four quarters, with an average beat of 9.27%.
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