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Why Is Brown & Brown (BRO) Up 4.6% Since Last Earnings Report?

Zacks Equity Research
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A month has gone by since the last earnings report for Brown & Brown (BRO). Shares have added about 4.63% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to its next earnings release, or is Brown & Brown due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Brown & Brown Q2 Earnings Miss Estimates, Improve Y/Y

Brown & Brown reported second-quarter 2018 earnings of 26 cents per share, missing the Zacks Consensus Estimate by 3.7%. However, the bottom line improved 8.3% year over year.

Nonetheless, the quarter witnessed strong organic revenue growth along with increase in commissions and fees. The insurance broker’s business continued to show prowess and inorganic growth remained strong with new buyouts. Though expenses increased, the bottom line benefited from low tax incidence.

Behind the Headlines

Total revenues amounted to $473.1 million, edging past the Zacks Consensus by 0.7%. Moreover, the top line inched up about 1.5% year over year, riding on higher Commissions and fees plus net investment income. Organic revenue growth was 5.2% in the reported quarter.

Commissions and fees grew 1.6% year over year to $472 million.

Investment income surged 75% year over year to $0.7 million.

Total expenses increased nearly 3.9% to $372.2 million, driven by a rise in employee compensation and benefits, other operating expenses as well as interest expenses.

Net income before interest, income taxes, depreciation, amortization and a change in estimated acquisition earn-out payables (EBITDAC) margin contracted 320 basis points to 29.1%.

Financial Update

Brown & Brown exited the second quarter with cash and cash equivalents of $477.9 million, down 16.7% from the 2017-end level.

Long-term debt of $847 million as of Jun 30, 2018 was down 1.1% from the level at 2017 end.

Net cash provided by operating activities for six months ending Jun 30, 2018, came in at $274 million, up 1.4% from the same period in 2017.

Adoption of New Accounting Standard

On Jan 1, 2018, Brown & Brown adopted FASB Accounting Standards Update No. 2014-09, ‘Revenue from Contracts with Customers (Topic 606)’ and Accounting Standards Codification (Topic 340) — Other Assets and Deferred Cost. This hurt the top line by $27.2 million and the bottom line by 5 cents in the quarter under review.

Dividend Update

The board of directors approved a dividend of 7.50 cents per share, payable Aug 15, 2018 to shareholders of record on Aug 8, 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Brown & Brown has an average Growth Score of C, a grade with the same score on the momentum front. The stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks''style scores indicate that the company's stock is suitable for growth and momentum investors.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, Brown & Brown has a Zacks Rank # 3 (Hold). We expect an in-line return from the stock in the next few months.


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