Insurance broker Brown & Brown ( BRO) has been blowing past quarterly estimates, thanks to the successful integration of a string of acquisitions and rising insurance premium rates. In its just-announced full-year results, the company's 2001 top-line growth of 37.5% translated into a 60.4% increase in earnings per share, to 85 cents. Insurers are a risky lot, as unforeseen claims can wreck a quarter. But as a broker, Brown & Brown has much less risk. It simply takes on commissions and passes the risk on to the underwriter. And when insurance premiums are rising, as they have been in recent months, the company gets more money for little extra effort. A 10% rise in premium renewal rates can yield a 20% gain in Brown & Brown's profits, according to Hyatt Brown, the company's chairman and CEO. Brown & Brown's forte is finding underperforming mom-and-pop insurance brokers and integrating them into their sales network. "Many of these family-owned outfits are more focused on minimizing taxes than maximizing profits," says Brown. He encourages new employees that join the firm through acquisitions to become more aggressive in soliciting new business. That strategy has paid off handsomely. EPS grew 62% last year and could rise another 30% this year. Motivating the sales force while keeping a lid on general and administrative expenses has helped Brown & Brown post the strongest profit margins in the business. Industry leaders such as Aon ( AOC), Marsh & McLennan ( MMC) and Arthur J. Gallagher ( AJG) have net margins in the 4% to 10% range. B&B's net margins now approach 16%.
Of course, a consistently strong financial performance has led to a surge in the company's shares. They've been rising steadily for the last five years, and now trade at a slight premium to the industry average multiples. But since the insurance industry brokerage industry is still highly fragmented, B&B is in a position to maintain its steady growth. So I think the shares look attractive at 15 times projected 2002 EBITDA . So do insiders. Four executives have purchased since June 2001, as BRO was hitting new all-time highs. Though the dollar value of the purchases -- $230,000 worth in 2001 -- is not as great as at other companies I have recommended, and the buying was more spread out over months, this does qualify as a buying cluster. In any case, the buying was enough to focus our attention on B&B's fundamentals, and I like what I see. last week's column about past decisions by AMT's management and the lack of solid valuation metrics for AMT's industry, readers could not help but unleash yet more vitriol -- er, intriguing insights -- regarding the company's practices. If the comments are a sampling of reality, AMT seems to have a higher-than-normal share of cheated employees, unpaid suppliers, ditzy decision makers and generally disgruntled shareholders. All that was missing was a letter from an animal lover who had seen a member of senior management kicking a dog. Well, to all those who have been burned by AMT, please know that I am now among your ranks. I obviously got too cute with AMT after managing a 14.3% gain in just four weeks. Last week's position was stopped out for a 14.1% loss in just two days as AMT crashed through the $5 stop loss I had set. Although my total experience with AMT was one of basically breaking even, my latest bout with AMT represents the largest loss I've taken on a position since the end of September -- and I have a feeling quite a few of you out there are pretty darned happy about my loss. I hate being on the business end of schadenfreude. Yet, since I was never as emotionally involved as many obviously are with AMT, I find it difficult to lose sleep over the loss. It was one of 67 positions I have recommended over the past four months in InsiderInsights, not the one stock I poured my daughter's college fund into. Of those 67 I've recommended, only seven were losers as of the last issue. The average return of all the positions as of the latest issue was 18.9%, with the average holding time just 8.7 weeks. Having more winners than losers, and having your winners go up more than your losers go down, is what I try to accomplish. It is completely human to let emotions get involved, and I must admit being tempted to jump in again. Surely this market leader in an important and growing industry can't trade much lower, right? Maybe the next chapter I write for AMT will be a crowing vindication. Perhaps, or maybe the next chapter associated with AMT has the numbers 7 or 11 associated with it. But leaving emotions out of it, I just have to admit that, for me, this stock isn't worth getting back into. It hasn't traded like I expected it to twice now, and that's enough for me to admit to myself that I don't really get this one. Instead of pounding my head against the wall and expending even more time to try to determine AMT's next move, I choose to focus my efforts and capital on a more understandable and reliable investment (like the one presented above, for example).