Brown & Brown's Revenue Growth Impressive, High Costs A Woe

Brown & Brown, Inc. (NYSE:BRO) has established a robust product and service portfolio over a considerable period by catering to growing and ever-changing demands of clients for years. Historically, the clients have largely benefitted from the company’s bouquet of diverse insurance products and services and by retaining this optimism, the Zacks Rank #3 (Hold) insurance broker continues to evolve stronger over time and looks set to repeat the success streak in the near future.

Growth Drivers

Brown & Brown’s growth trajectory remains impressive, primarily driven by organic and inorganic means across all segments. Strategic buyouts coupled with mergers have enabled the company to expand operationally and we expect the insurance broker to continue investing in such initiatives that might accelerate the company’s overall growth.

Interestingly, the company’s strategic efforts led to an increase in commission and fees over the past few years, resulting in substantial revenue growth. For 2018, the company expects improving commissions and fees to drive revenues, projected to grow between $8 million and $11 million.

Moreover, the insurance broker has pinned its hopes on the new Core Commercial Program, which will ultimately boost the company’s organic revenue growth. However, there is a downside to this program as it is still in the investment phase and is likely to leave an impact on the margins through 2019.

Brown & Brown intends to create a wide range of national programs, which will help the company achieve balanced growth. The insurance broker is focused on efforts to bring about a new annual incentive program for its middle-market producers in the Retail division, which has been created to pay for increased activities. Brown & Brown expects this program to fuel inorganic growth in the near future through focus on customer retention and new business.

This apart, a robust capital position has helped the company boost shareholder value via dividend increases and share buybacks. These shareholder-friendly moves continue to raise optimism among investors.

Growth Projections: The stock has seen the Zacks Consensus Estimate for current-year earnings per share being pegged at $1.22 on revenues of $1.96 billion. While the top line reflects a year-over-year rise of 4%, the bottom line represents an increase of 27.1%. For 2019, the consensus mark for the metric stands at $1.33 on $2.07 billion revenues. While revenues represent a 5.7% improvement, earnings reflect 8.6% growth.

An Outperformer: Shares of Brown & Brown have gained 6.7% year to date, outperforming the industry’s 4.7% increase. We expect the company’s sustained operational performance, higher commissions and fees plus a solid capital position to drive the stock higher in the near term.

Positive Earnings Surprise History: Brown & Brown displays an encouraging earnings surprise history, having outpaced the Zacks Consensus Estimate in each of the trailing four quarters with an average beat of 9.53%.

Attractive Valuation: Looking at the company’s price-to-book ratio, the best multiple for valuing insurers because of large variations in their earnings results from one quarter to the next, valuation looks attractive at the current level. The company has a trailing 12-month P/B ratio of 2.7, falling noticeably below the industry average of 4.4.

Near-Term Headwinds

Escalating expenses, mainly due to higher compensation and operating expenses, continues to restrict the operating margin expansion. Moreover, the company does not expect a turnaround on this front anytime soon.

Net income before interest, income taxes, depreciation, amortization and the change in estimated acquisition earn-out payables (EBITDAC) margin in 2018 is anticipated to be impacted, due to the company’s current investment phase. Significant impact on margins is expected in the first half of 2018 while margin expansion is projected in the second half of this year, which should continue into 2019 as well.

Stocks to Consider

Some better-ranked stocks from the insurance industry are Alleghany Corporation (NYSE:Y) , Markel Corporation (NYSE:MKL) and The Navigators Group, Inc. (NASDAQ:NAVG) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally. The company delivered positive surprises in three of the last four quarters with an average beat of 17.61%.

Markel markets and underwrites specialty insurance products in the United States, the United Kingdom, Canada and internationally. The company came up with positive surprises in two of the last four quarters with an average beat of 15.54%.

Navigators Group underwrites marine, property and casualty plus professional liability insurance products and services in the United States and internationally. The company pulled off positive surprises in three of the last four quarters with an average beat of 14.66%.

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