Morgan Stanley Downgrades Brown & Brown To Underweight

• Brown & Brown, Inc. BRO shares have been volatile in the past one year, and are down 6 percent since January 27, 2015.
• Morgan Stanley’s Kai Pan downgraded the rating for the company to Underweight, while reducing the price target from $33 to $30.
• Continued macro headwinds and technology investments are expected to restrict the company’s organic growth while pressurizing margins, Pan stated.

Analyst Kai Pan mentioned that Brown & Brown’s high exposure in Florida and the company’s middle market focus indicate high macro headwinds. The company’s organic growth decelerated from 6.7 percent in 2013 to 3.5 percent in 2014 and further to 2.6 percent in 2015.

Management does not expect a substantial improvement in the macro economic scenario in the near future. The performance of the company’s Retail and National Program divisions has been significantly affected in the recent years, Pan pointed out.

The organic growth estimates for 2016 and 2017 have been reduced from 2.9 percent to 2.8 percent and from 3.4 percent to 3.3 percent, respectively.

The company’s planned investments of $30-40 million over a 2-3-year period are expected to put near-term margins under pressure. “We estimate -50bps/-30bps margin contraction in 2016-17e, respectively,” the Morgan Stanley report noted.

Pan believes that these investments are necessary to provide the organization with a more unified platform for growth and control. The EPS estimates for 2016 and 2017 have been reduced from $1.87 to $1.79 and from $2.10 to $1.94, respectively.