Baldwin Insurance Group has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 5.4% to $27.62 per share while the index has gained 9%.
Is now the time to buy Baldwin Insurance Group, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Baldwin Insurance Group Not Exciting?
We’re sitting this one out for now. Here are three reasons we avoid BWIN, plus one stock we’d rather own.
1. Adjusted Operating Margin in Limbo
Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Looking at the trend in its profitability, Baldwin Insurance Group’s adjusted operating margin might have fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was negative 5.1%.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Baldwin Insurance Group’s margin dropped by 5.1 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. Baldwin Insurance Group’s free cash flow margin for the trailing 12 months was breakeven.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Baldwin Insurance Group’s $2.63 billion of debt exceeds the $456.1 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $364.9 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Baldwin Insurance Group could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Baldwin Insurance Group can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Baldwin Insurance Group isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 12.4× forward P/E (or $27.62 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better investments elsewhere. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Baldwin Insurance Group
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