Brown & Brown (BRO), the world’s sixth or seventh largest insurance agent/broker, recently missed estimates by a fairly significant margin. The stock is down about 6% for the week and has fallen from its 2009 high of $20 to $16.50. Here are some reasons why I think BRO is a good potential investment:
- It’s at a historically low P/E of 14 (earnings yield of about 7.1%) after ranging from the 20s to lower 30s for the past decade
- Cash flow yield is in the double digits at 11.6%
- Has grown shareholder’s equity at 28.6% annualized
- ROE is quite good — has been in the upper 20s to low 30s
- Operating margins are also good — in the mid-to-upper 30s
- Some other good value investors own the stock like Tom Gayner and Richard Cunniff
Here’s a chart of BRO’s stock price and normalized P/E ratio for the past 15 years:
As you can tell from the chart, it generally was a good time to purchase the stock after a peak in the P/E ratio, after the ratio had compressed by about 50%. It seems we are in a similar situation where the last clear peak was in 2005 and 2006 when the ratio was at 30. With a P/E now at 14, this looks like another good entry point for BRO.
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