Is Brown & Brown (BRO) Pricing Make Sense After 20% One Year Share Price Decline?

• Wondering whether Brown & Brown at around US$80.64 is offering fair value right now, or if the market is mispricing it? This article walks through that question in plain English.
• The stock is up 3.9% over the last week and 4.0% over the last month, but that comes after a 20.4% decline over the past year, even with 3 year and 5 year returns of 34.2% and 80.1% respectively.
• These moves have kept Brown & Brown on many investors' radars, as they reassess what the recent share price says about expectations and risk. In this context, pricing history becomes a useful backdrop for weighing what the company might reasonably be worth today.
• On our valuation checks, Brown & Brown scores 3 out of 6, and you can see the full breakdown in the valuation score. This sets us up to compare different valuation methods next and then look at an even richer way to think about value at the end of this article.

Find out why Brown & Brown's -20.4% return over the last year is lagging behind its peers.

Approach 1: Brown & Brown Excess Returns Analysis

The Excess Returns model looks at how much profit a company is expected to generate over and above the return that shareholders require, then capitalizes those excess profits into a per share value. It focuses on how efficiently equity is used, rather than just projecting cash flows.

For Brown & Brown, the model uses a Book Value of $36.75 per share and a Stable EPS of $6.78 per share, based on the median Return on Equity from the past 5 years. The assumed Cost of Equity is $2.94 per share, which implies an Excess Return of $3.84 per share. That excess is supported by an Average Return on Equity of 16.04% and a Stable Book Value estimate of $42.27 per share, based on weighted future book value estimates from 2 analysts.

Putting these inputs together, the Excess Returns model produces an intrinsic value of about $146.10 per share. Compared with the recent share price of about $80.64, this implies the stock is around 44.8% undervalued on this approach.

Result: UNDERVALUED

Our Excess Returns analysis suggests Brown & Brown is undervalued by 44.8%. Track this in your watchlist or portfolio, or discover 879 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Brown & Brown.

Approach 2: Brown & Brown Price vs Earnings

For a profitable company like Brown & Brown, the P/E ratio is a straightforward way to think about value because it connects the share price directly to the earnings that each share is generating. In general, higher growth expectations and lower perceived risk can justify a higher P/E, while slower expected growth or higher risk usually mean a lower, more conservative P/E looks reasonable.

Brown & Brown is currently trading on a P/E of about 27.8x. That sits above the Insurance industry average P/E of 12.9x and below the peer group average of 44.5x. To refine that comparison, Simply Wall St uses a proprietary “Fair Ratio” for the P/E, which estimates what a more tailored multiple could look like after considering factors such as the company’s earnings profile, industry, profit margins, market cap and identified risks.

Because the Fair Ratio for Brown & Brown is 16.5x, which is materially below the current P/E of 27.8x, this framework suggests the shares are pricing in more optimism than the model implies.

Result: OVERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1444 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Brown & Brown Narrative

Earlier we mentioned that there is an even better way to understand valuation. On Simply Wall St's Community page you can use Narratives, where you and other investors link a clear story about Brown & Brown to specific forecasts for revenue, earnings, margins and a fair value. You can then compare that fair value with the current price to decide whether the stock looks attractive or expensive. Those Narratives update automatically as new news or earnings arrive. For example, one investor might build a higher fair value Narrative around the idea that acquisitions, cash flow and share repurchases support a target closer to US$130, while another might focus on risks like legislative changes, CAT property rates and margin pressure and settle on a more cautious view closer to US$87.

Do you think there's more to the story for Brown & Brown? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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