It’s another week of picking meat off bones like vultures on an old carcass. Although insider buying peaked, not surprising following a week of heavy selling, insider buys with purpose were hard to find. Brown & Brown, Inc. (BRO) is the only company to draw our interest.
So you know, Brown & Brown is the fifth largest independent insurance brokerage in the nation. They provide risk management solutions and services to businesses, corporations, governmental institutions, professional organizations, trade associations, families, and individuals.
Director James Hays purchased 10,000 shares of the insurance company’s stock at cost average of $43.375, spending $433,750. (1) There are a couple of reasons this buy is like a neon light on a tree-covered, back-road in the Pennsylvania woods at midnight.
- Hay has never made an insider purchase before. More than 400 grand is a hell of a first trade. (2)
- There was only one other insider buy since late 2013. Sellers have dominated the action in BRO for the last 17-years. (3)
It appears Hays was value shopping. The Florida-based insurers’ shares recently traded as high as $47.98 before falling as low as $42.72. Shares of BRO took a hit after reporting fourth quarter earnings that were slightly ahead of the pace Wall Street predicted. Earnings per share were $0.32, three cents more than the $0.29 consensus. (4) Meanwhile, revenue hit $642.1 million. (5)
Investors might have hit the sell button because investment income slipped, and debt took a sizeable step up. When BRO’s share price dropped, Director Hay might have seen it as an opportunity to take advantage of misplaced weakness. So far so good as Brown & Brown is up a little more than $2 per share for Hays, closing business at $45.50 on Monday, February 8, 2021.
Nine analysts see the BRO generating consensus EPS of $1.81 in 2021, up from $1.67 last year. The top line is projected to reach $2.85 billion for the year, 9% ahead of 2020’s $2.61 billion. (6) Based on Brown’s recent price-to-earnings (P/E) and price-to-sales (P/S) histories, Hays could be looking past 2021 or a major shift is coming that alters BRO’s top and bottom lines in a big way.
For the last half-decade, investors have awarded Brown & Brown with an average P/E of 24.82 and an average P/S ratio of 4.03. If we apply those valuations to current forecasts for earnings and revenue, we get potential price targets of $44.92 and $40.57, respectively. Second grade math tells you both are losing propositions for today’s price. A 37-cent dividend is nowhere near enough to make up for the valuation shortfalls.
Experience says one of two things is in play for Director Hays:
- Sales and revenue targets are about to go up because of possible impending deals.
- He is in it for the long haul, a time horizon beyond two-years.
Outlook: Unless something alters Brown & Brown, Incorporated’s (BRO) earnings and revenue results for the better, BRO shares appear fully valued. For new investors to make market returns, the stock would need to trade at the upper valuation boundaries.
BRO is appropriate for investors with a time horizon of at least two years, based on current forecasts and the company’s historical valuations. Unless Brown’s fundamentals shift to the upside via new business, it’s our opinion that BRO is more likely to be a laggard than a leader.
1 – https://www.secform4.com/insider-trading/1757909.htm
2 – https://www.secform4.com/insider-trading/1757909.htm
3 – https://www.secform4.com/insider-trading/79282.htm
4 – https://finance.yahoo.com/quote/BRO/analysis?p=BRO
5 – https://finance.yahoo.com/news/brown-brown-inc-announces-quarterly-220000414.html
6 – https://finance.yahoo.com/quote/BRO/analysis?p=BRO