The Progressive Corp (NYSE:PGR)

CAPS Rating: 4 out of 5

An insurance holding company which offers a number of personal and commercial property-casualty insurance products primarily related to motor vehicles.

Recs

3
Player Avatar JtHExperimental (25.10) Submitted: 6/24/2009 12:08:36 AM : Outperform Start Price: $11.88 PGR Score: -1.22

This is a very untraditional Jakila The Hun pick. Not sure how it'll work out. This green thumb is based on my belief that Progressive has long-term advantages in the insurance business that will help them to succeed moving forward. See Navi Ragarajan's article comparing Progressive and Berkshire Hathaway subsidiary, GEICO, for a bit of an analysis on this:

http://seekingalpha.com/article/144346-geico-vs-progressive-selected-10-year-metrics

I also like the fact that Progressive has a very strong balance sheet that might *understate* to some degree their actual strength. Note that a very substantial chunk of PGR's total assets are tied up in investments (maybe 2/3 of total assets). Much of that was fixed maturity investments, but notice they also had fairly large equity holdings that are probably undervalued on the books over the long term since the market is overly beaten down right now (and was even more beaten down on 3/31/09; the date of their last 10-Q). I came up with a current book value of around $6.30 per share for PGR, but I could see how that could jump up to at least $7.00 - $8.00 in a better environment.

I am by no means an expert on the insurance industry, but earnings and cash flows have been relatively strong for PGR. For FY '07, they earned about $1.60 per share and in FY '06, they brought in earnings of $2.10 per share. PGR technically turned a 10 cent per share loss for FY '08, but it's deceiving because most of that comes from a $1.45 billion realized loss on equity securities. That's not going to happen again moving forward. If you ignore that one item, they had earnings of $2.01 per share for FY '08. For the most recent quarter, they had earnings of 35 cents per share, as well.

It's difficult for me to come up with some form of "normalized earnings" for PGR, but I'd wager to say that even if we played it on the conservative side, we could say around $1.40 per share. Using a 9.5% cost of capital (which might be high considering that their notes have paid out about 6% - 7% in interest traditionally), I come up with a valuation of $28 using the $1.40 figure with a 3% growth rate. If I up that to $1.65, it's closer to $31. At $2, it's closer to $36 per share. I'm going to go with the conservative $28 with a reasonable discount for uncertainty --- so let's say $24.

The stock is currently selling at $14.50 and given PGR's significant long-term advantages, it looks like a bargain for more conservative investors with a long-term timeframe. This is a nice position that appears to be undervalued, but that should continue to grow in the future. My only qualm is the one pointed out by SuperPicks --- PGR seems expensive compared to some of its competitors. That my be good enough reason to stick around and see if one can get a better price. If it were to drop back to $12 or $10, it would be an absolute steal. All the same, this is not a bad pick-up at $14.50.

In the sense that this is a "conservative growth pick" that might be "on the expensive side comparatively", this is a very un-Jakila The Hun like selection, but I occasionally make these types of picks.

Outperform over a 5-10 year time frame.

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