The stock of Brown & Brown (NYSE:BRO, 30-year Financials) is estimated to be modestly overvalued, 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 $52.22 per share and the market cap of $14.7 billion, Brown & Brown stock gives every indication of being modestly overvalued. GF Value for Brown & Brown is shown in the chart below.
Because Brown & Brown is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 12.2% over the past three years and is estimated to grow 9.90% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Brown & Brown has a cash-to-debt ratio of 0.31, which which ranks worse than 88% of the companies in Insurance industry. The overall financial strength of Brown & Brown is 5 out of 10, which indicates that the financial strength of Brown & Brown is fair. This is the debt and cash of Brown & Brown over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Brown & Brown has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.7 billion and earnings of $1.85 a share. Its operating margin is 26.42%, which ranks better than 92% of the companies in Insurance industry. Overall, GuruFocus ranks the profitability of Brown & Brown at 8 out of 10, which indicates strong profitability. This is the revenue and net income of Brown & Brown over the past years:
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 71% of the companies in Insurance industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Brown & Brown's return on invested capital is 9.05, and its cost of capital is 5.28. The historical ROIC vs WACC comparison of Brown & Brown is shown below:
In short, the stock of Brown & Brown (NYSE:BRO, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 71% of the companies in Insurance industry. To learn more about Brown & Brown stock, you can check out its 30-year Financials here.
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