Brown & Brown’s Downgrade

Here’s Sandler O’Neill’s downgrade of Brown & Brown (BRO).

We are lowering our rating to Hold from Buy based on valuation. Brown & Brown is currently trading at 18.9x our forward twelve month earnings per share (EPS) estimate and at a 16% premium to next year’s EPS growth rate.
While we believe the company’s valuation premium relative to peers is warranted, given the company’s consistent operating performance, we believe additional multiple expansion in the near-term will be more challenging.
Since upgrading the stock to Buy on June 9, 2005, Brown & Brown has appreciated 24%.
We continue to view the company’s operating landscape as attractive and could turn more positive on the stock should property and casualty premium pricing harden more than we expect in Brown & Brown’s territories.

They’re right. The stock has rallied lately, but what I’m afraid they’re missing is how strong BRO’s earnings growth has been. For proof, you can see that BRO (black line) has consistently outperformed its peer group (gold line) over the past few years, and its P/E ratio (lower graph) is still pretty cheap compared with recent history. The earnings multiple is about where it was in 2002, and the stock is much, much higher.
bro.bmp

Posted by on November 3rd, 2005 at 5:19 pm


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