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Price-to-sales and price-to-earnings ratios of five listed U.S. brokers, November 2015

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According to traditional financial theory, a firm’s value is a function of its existing net worth and of its future profits. The way in which stock markets value large, traditional, listed brokers appears to be consistent with this.

The table below includes some of the largest brokerages / consulting firms in the world and was compiled on November 23, 2015.

As of late November 2015, the five firms exhibit a remarkable consistency in their price-to-earnings ratios, which are in the 20 – 22 bracket. The one exception is Willis, slightly lower at 18, a fact which may be explained by its ongoing merger project with Towers-Watson that may be driving some speculative activities in the stock market.

In comparison to price-to-earnings ratios, the price-to-revenues ratios show greater variances, going from 1.5 for AJ Gallagher to 2.9 for Brown & Brown, in fact reflecting different levels of profitability.

Two lessons can be drawn: The insurance brokerage industry appears to be valued in a homogeneous way by financial markets. And, financial markets rely more on profits than on sales as drivers of stock prices.

As a comment, even the less homogeneous price-to-revenues ratios of these firms do not include wild outliers: No firm is valued at 5 or 10 or 20 times sales. This is consistent with observations of private transactions and with industry wisdom, according to which “a broker is worth one to three times yearly sales”. Anything outside that bracket needs to be justified by “special circumstances”. Such “special circumstances” may include extraordinary prospects for the firm, not yet reflected in current sales or profits; precious assets not on the balance sheet (patents and other intellectual property come to mind); or outlandish investor appetite, usually driven by excessive liquidity and/or by factors familiar to behavioral finance specialists. Behavioral finance is basically about finding rational explanations for irrational behaviors in financial markets. Rational explanations, not necessarily sustainable explanations.

As of
Stock price
(USD bn)
(USD bn)
Capitalization/ Earnings (PE)
MarshMac 56 29,1 12,8 2,3 20
AON 95 26,0 11,7 2,2 22
AJ Gallagher 45 7,8 5,3 1,5 22
Willis 47 8,4 3,8 2,2 18
Brown&Brown 33 4,6 1,6 2,9 22


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