Auto Insurer Progressive’s Shares Could See Smoother Road Ahead
Barron's
Jun 12, 2020
It’s the best of times for car insurers—but not for their stocks. That could make it a good time to buy shares of Progressive.
Stay-at-home orders have forced people to stay put, which means fewer cars on the roads, fewer accidents, and fewer claims to pay. As a result, profits are soaring for auto insurers such as Geico, State Farm, and Progressive (ticker: PGR). Times are so good, in fact, that they are giving premium rebates to policyholders.
Yet Progressive’s stock has risen just 1% in the past three months, to a recent $76.50, even as the S&P 500 has gained 10%. Investors apparently are concerned about what the company’s earnings will look like once people start driving again, and they’re worried about longer-term issues, including the rise of autonomous vehicles.
They needn’t worry: At 14 times next year’s expected earnings and a valuation below its historical average, Progressive’s stock reflects a lot of bad news. The shares’ underperformance has given investors an opportunity to buy a growth stock at a value price.
Americans love to drive, but the coronavirus pandemic has done the seemingly impossible—forced them off the road. Miles traveled on U.S. highways fell 19% year over year in March, and 40% in April. Less travel has meant fewer crashes, and fewer claims for Progressive to cover. The company’s loss ratio—claims paid, divided by insurance premiums received—was almost 20 percentage points lower in April than a year earlier, falling to a “historically low” level, says Bill Wilt, an analyst at Gordon Haskett.
As a result, earnings estimates for Progressive’s current quarter have risen over the past few weeks, from roughly $1.30 a share to $1.80. But earnings are expected to fall 11% next year, to $5.45 a share, as more normal levels of driving resume. That raises an obvious question: Why pay up for earnings growth that isn’t likely to last?
Other changes wrought by the coronavirus are more helpful to auto insurers. For one, the widespread launch of autonomous vehicles has been pushed back as car makers try to preserve cash. With self-driving technology costing billions of dollars to develop, the timeline for fully autonomous cars likely has been delayed by a couple of years.
“We called a winter for pure autonomous driving ventures a year ago,” New Street Research analyst Pierre Ferragu tells Barron’s. “The technological breakthrough didn’t come. These businesses have made great progress, but see the goal post of a sustainable business model moving back for every step they take forward on the tech and performance front.”
If a slower shift to autonomous driving means more drivers will stay behind the wheel, a societal shift could see their ranks grow in coming years. Millennials, now the largest generation in the U.S., aren’t getting licensed to drive at the same clip as prior generations. About 80% of U.S. residents 24 to 44 years old have a driver’s license. Twenty years ago, that figure was closer to 90%. When people hit 40 and beyond, however, the vast majority in America find they need to drive. That could mean another 20 million licensed drivers, or 10% more customers for auto insurance.
Wall Street recognizes the opportunity, at least in part. Progressive is a relatively popular stock with securities analysts, and about 55% to 60% of those covering the company rate the shares the equivalent of Buy, similar to the 55% Buy ratio for stocks in the Dow Jones Industrial Average. The average analyst price target for Progressive shares is about $88, or 15% above current levels. But the opportunity could be greater than that.
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