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UPDATE: Compass Point Reiterates On Brown & Brown As Stock Buyback Should Offset Reduced M&A Opportunities

Dwight Einhorn

In a report published Wednesday, Compass Point analyst Ken Billingsley reiterated a Neutral rating on Brown & Brown (NYSE: BRO), and raised the price target from $33.00 to $34.00.

In the report, Compass Point noted, “The company reported higher than expected revenue growth during the quarter, but this was offset by higher expense margins. When adjusting for recent acquisitions (and comparing YoY results) operating margins improved, however, Beecher Carlson results will be included in these comparisons beginning in 3Q14 and adjusted YoY comparisons may not appear as favorable.

"We believe the integration of Wright Insurance Group will continue to add margin pressure through 2014, and expect margins to begin to improve in 2015 on an annual basis. The company expects to generate 4% organic growth for 2014 but given the current trend in premium rates, we believe this could become more difficult to attain in 2015. BRO has approved a $200M stock buyback program to offset concerns that M&A opportunities may be getting too expensive in the current market. This could slow overall revenue growth expectations in future quarters. While acquisition revenues were much stronger in the quarter than we had expected, this could be due to timing of when these revenues were received by the company versus where we had modeled them to be earned.

"Our model assumes continued revenue growth from prior acquisitions, as well as a declining share count through 2015 related to the approved share repurchase announcement.”

Brown & Brown closed on Tuesday at $31.57.

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