Brown & Brown: A "Tortoise" Stock

11/13/2020 5:00 am EST

Focus: FINANCIALS

Stephen Mauzy

Income-Investing Specialist, Wyatt Investment Research

Brown & Brown (BRO) is a quintessential tortoise stock; you should plan on owning its shares for many years, suggests Steve Mauzy, editor of Wyatt Research's Personal Wealth Advisor.

Brown & Brown is an insurance broker. The company generates revenue and earnings in the most plodding way — selling insurance. Brown & Brown doesn’t sell its own insurance, mind you.

It sells the insurance underwritten by other insurance companies. Brown & Brown is a huge collection of local insurance agencies. It has been selling insurance and collecting commissions since 1939.

Brown & Brown has increased its annual revenue every year since 1993, with one exception. Annual revenue grew at a 9% average annual rate over the past five years. Net income grew an 11.5% average annual rate.

Established tortoise stocks tend to be low-volatility holdings. Brown & Brown is no exception. Its five-year average beta is 0.70. This means the shares have been roughly 70% as volatile as the S&P 500.

Meanwhile, Brown & Brown shares are up 383% since January 2010. The S&P 500 is up 188%. Brown & Brown shares have appreciated twice as fast as the S&P 500 over the past decade. 

The insurance brokerage industry is highly fragmented with a lot of mom & pop operations. Indeed, Brown & Brown has acquired well over 500 of these operations over the past three decades. The business remains highly fragmented. Many more acquisitions are to be had.

The pandemic has failed to impede this tortoise’s progress. Brown & Brown recently reported quarterly financial results. It reported another strong quarter. Revenue posted at $674 million to beat Wall Street’s consensus estimate by $28.5 million. Adjusted EPS posted at $0.52, beating the consensus estimate by $0.09.  

Brown & Brown shares trade around 20 times trailing free cash flow when fairly valued. They trade at around 17.5 times free cash based on the $2.51-per-share of free cash flow reported for the trailing 12 months.

My 12-month price target is $51 a share. That’s roughly 16% upside from the market price as I write. I concede that the immediate appreciation potential is hardly spectacular. But we’re looking beyond next year, even beyond the next decade.

Earnings grow roughly 11% annually. This growth rate translates to a high probability your investment will double every six years or so. If you are patient enough to exploit the opportunity, your Brown & Brown shares in 15 years should be worth eight-to-12 times what you paid today. 

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