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I asked ChatGPT whether Brown & Brown (NYSE:BRO) – an S&P 500 insurance broker down almost 40% from its high – is a Buy. The answer was a firm ‘it depends’.
There’s a certain irony here. Brown & Brown’s own AI partner is Anthropic (more on that later). But the overall answer is an interesting one.
A good industry
Brown & Brown serves the mid-market, mostly in the US. Its clients need more than a local agent, but they don’t need – and don’t want to pay for – the global clout of a Marsh or a Willis Towers Watson.
It’s a nice industry. Insurance brokers don’t carry underwriting risk or need much capital, so returns on invested capital tend to be high.
The company’s grown through acquisitions as well as organically for decades and there’s still potentially a long runway ahead. So why’s the stock at $59.91, down from a 52-week high of $96.55?
There are three main reasons:
- Rival Howden has poached around 275 staff – management now expects a $50m-$60m revenue hit this year.
- Investors are worried AI might disintermediate brokers.
- The Accession acquisition from 2005 has taken total debt to around $7.8bn, just as property insurance pricing softens.
Two stories
ChatGPT says the short-term picture is bearish. The stock’s below its 50- and 200-day moving averages, its RSI is approaching oversold territory, and there’s a danger of it breaking support at $59.
Honestly, I’m not really sure what most of that means and that makes me wary about the possibility of AI hallucinations. But the fundamental story’s different – and that’s something I can check out:
| Metric | Figure |
|---|---|
| Q2 adjusted EPS growth | 3.9% |
| H1 adjusted EPS growth | 6% |
| H1 organic revenue growth | -0.3% |
| Trailing P/E | 18.9 |
| 5-year median P/E | 27.4 |
| Forward P/E | 13 |
The detail investors should pay attention to is organic growth. That’s slightly negative, which means acquisitions are doing the heavy lifting in propelling the company forward.
The Howden lawsuit is ongoing, but Brown & Brown has won some early rulings. And Howden has until 16 October to hand over more documents.
Trading or investing?
ChatGPT’s verdict is that the stock’s worth considering over five-year time horizon. But it might have further to fall in the meantime.
That gets to the difference between trading and investing. The stock market’s a voting machine in the short term, but a weighing machine in the long term – and I think Brown & Brown has real weight.
The AI threat’s real, but the Howden story tells us something important. Rivals aren’t hiring hundreds of brokers because software is about to replace them – they’re doing it because relationships matter.
On top of this, Brown & Brown has a real advantage that comes from the negotiating power that its scale provides. And that’s not easy to disrupt for an AI newcomer.
Where’s the edge?
AI raises interesting questions for investors. When everyone has access to the same tools for analysing share prices, it’s hard to see where an edge comes from.
My answer is to stretch out the time horizon. Others are worried about Brown & Brown’s technicals over months – I’m thinking about the business over years. So I’m happy to keep adding, as long as the firm’s competitive position remains intact. And if the share price falls further, I’ll bring my average cost down.
Should you invest £5,000 in Brown & Brown right now?
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Stephen Wright owns shares in Brown & Brown.
This story originally appeared on Motley Fool
