Has Brown & Brown (BRO) Fallen Too Far After Recent Share Price Pullback?

• If you are wondering whether Brown & Brown is offering fair value at its current price, the stock’s mixed return profile and valuation checks provide a useful starting point.
• The share price last closed at US$66.56, with returns of a 1.6% decline over 7 days, a 3.3% decline over 30 days, a 14.2% decline year to date, a 44.0% decline over 1 year, but gains of 23.3% over 3 years and 50.0% over 5 years.
• Recent coverage around Brown & Brown has focused on its position within the insurance sector and how investors are reassessing risk and pricing for insurance intermediaries. Together with the share price record, this context helps explain why some investors are now rechecking what they are willing to pay for the business.
• Brown & Brown currently has a valuation score of 4/6, which means it screens as undervalued on four of six checks. The rest of this article will compare different valuation approaches before finishing with a way to think about value that goes beyond any single model.

Find out why Brown & Brown's -44.0% 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 above the return that shareholders require, then converts those extra profits into an estimated per share value.

For Brown & Brown, the model starts with a Book Value of $37.34 per share and a Stable Book Value estimate of $43.20 per share, based on future book value estimates from 2 analysts. It pairs this with a Stable EPS of $6.53 per share, sourced from weighted future Return on Equity estimates from 4 analysts, and an Average Return on Equity of 15.12%.

The Cost of Equity is set at $3.01 per share, which implies an Excess Return of $3.52 per share. Those excess profits are capitalized over time to arrive at an intrinsic value from this model of about $141.82 per share.

Compared with the recent share price of $66.56, the Excess Returns valuation implies a 53.1% discount, which points to Brown & Brown trading well below this model’s estimate of value.

Result: UNDERVALUED

Our Excess Returns analysis suggests Brown & Brown is undervalued by 53.1%. Track this in your watchlist or portfolio, or discover 49 more high quality undervalued stocks.

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 useful shorthand for how much you are paying for each dollar of current earnings. It ties directly to what the business is earning today, which many investors find easier to relate to than more complex cash flow models.

What counts as a “normal” or “fair” P/E usually reflects the market’s view of two things: how much growth it expects in earnings and how much risk it sees in those earnings. Higher growth or lower perceived risk can support a higher P/E, while lower growth or higher risk often lines up with a lower P/E.

Brown & Brown currently trades on a P/E of 21.7x. This sits above the Insurance industry average P/E of 11.1x and below the peer average of 35.5x. Simply Wall St’s Fair Ratio for Brown & Brown is 14.9x, a proprietary estimate of what the P/E might be given factors such as earnings growth, profit margins, risks, industry and market cap. Because it adjusts for these company specific drivers, the Fair Ratio can offer a more tailored benchmark than a simple comparison with industry or peer averages. Against this 14.9x Fair Ratio, the current 21.7x P/E suggests Brown & Brown trades at a richer level.

Result: OVERVALUED

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Upgrade Your Decision Making: Choose your Brown & Brown Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St’s Community page let you spell out your story for Brown & Brown, connect it to your own assumptions for future revenue, earnings and margins, convert that into a Fair Value, then compare it with the current price to help you decide what to do. The platform keeps that Narrative updating as fresh news or earnings arrive. This is why one investor might build a Narrative around the higher US$130 analyst target and another might lean toward the US$87 view, yet both can clearly see how their different stories feed into different forecasts and valuations.

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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