Investors who owned shares of The Progressive Corp. (PGR, Financial) must have felt reassured when the head of their biggest auto insurance rival, Warren Buffett (Trades, Portfolio), told Berkshire Hathaway's (BRK.A, Financial)(BRK.B, Financial) 2019 annual meeting:
"Progressive is a very well-run business. Geico is a very well-run business. And I think they will, for a long time, be the two companies that the rest of the auto insurance industry has trouble not losing share to. Progressive has been very well run. They have an appetite for growth. Sometimes they copy us a little, sometimes we copy them a little. And I think that'll be true five years from now and 10 years from now."
That opinion from Buffett was included in David Rolfe (Trades, Portfolio)'s commentary in Wedgewood Funds fourth-quarter 2020 shareholder letter. As for Rolfe himself, he observed:
"Progressive was a new addition to portfolios during the 4th quarter. Growth investors have widely eschewed financial stocks over the past decade, often for good reason. But we think there are a handful of superior financial service companies, including First Republic and S&P Global, that can generate attractive growth at superior returns. Progressive fits the bill as a Company capable of driving double-digit top-line growth, thanks to a decade-plus of property and casualty underwriting innovation, combined with an aggressive, but prudent, marketing strategy."
Other gurus weren't so bullish, as we see in this chart of their buying and selling over the past two years:
More on the gurus later.
What is Progressive?
It is a major property and casualty company, and in its most recent annual report it described itself in these terms:
- In business since 1937.
- One of America's largest auto insurance groups.
- The country's biggest seller of motorcycle policies.
- "The" market leader in commercial auto insurance.
- One of the top 15 carriers of homeowners' insurance.
Progressive operates through four segments:
- Personal Lines: This segment writes insurance for personal autos, recreational-type vehicles and special-line products. In 2019, it brought in 83% of total net premiums.
- Commercial Lines: Writes auto-related liability, physical damage insurance, business-related general liability and property insurance, mainly for small businesses. It represented 13% of total net premiums in 2019.
- Property: This line was added in 2015, following the acquisition of a majority interest in ARX (American Strategic Insurance). It writes property and renters' insurance and made up about 4% of total net premiums in 2019.
- Service Businesses: Represent less than 1% of total net premiums and includes Commercial Automobile Insurance Procedures/Plans (CAIP) and Commission-based businesses (where it acts as an agent for other insurance companies).
Competition: Progressive makes sales through both independent insurance agencies and direct sales channels. In both, it faces strong competition.
Success among companies depends on multiple factors. The company wrote, "Property-casualty insurers generally compete on the basis of price, agent commission rates, consumer recognition and confidence, coverages offered and other product features, claims handling, financial stability, customer service, and geographic coverage. Vigorous competition is provided by large, well-capitalized national companies in both the Agency and Direct channels".
Rolfe noted:
"Any discussion of Progressive (and Geico) would not be complete without a few words on both Companies' spirited and aggressive marketing. Creative marketing works. Creative marketing really works in auto insurance. One can hardly watch any network or cable-based television programming (particularly live sporting events) without being flooded by comedic car insurance ads. Geico's Gecko made his acting debut in 1998 – and its Caveman in 2004. Progressive's Flo made her debut in 2008."
While it does not name other companies, we saw Geico is a direct competitor; other major names in auto policies include State Farm (a mutual insurance company), Allstate (ALL, Financial) and USAA (mutual).
The growth strategy for Personal Lines (representing 83% of its total net premiums) is to be competitively priced. It is using technology to improve match rates and risks. In addition, it has introduced new risk verification variables that have improved its competitiveness.
Competitive advantages are scale, brand name and technical expertise.
Fundamentals
Progressive carries some debt, but it is not a cause for concern. Its debt-to-equity ratio is 0.32, based on short and long-term debt and capital lease obligations of $5.396 billion and total stockholders equity of $18.087 billion.
Its interest coverage ratio was 34.06, which shows the company has lots of operating income with which to cover its interest expenses. The Piotroski F-Score is considered typical for a stable company.
It earns significantly more, in return on invested capital, than it pays for those funds, based on the weighted average cost of capital. ROIC is 10.71% and its WACC is 3.65%.
The predictability score is 3 out of 5.
Progressive's combined ratio, its pretax underwriting profit or loss, was 87.8% in the first nine months of 2020, compared to 87.5% during the same period a year earlier. Both ratios are well below management's target of 96%.
Another key metric for insurers is ROE. The firm enjoys a robust return on equity of 35.53%.
Note, too, the strength of the three growth lines at the bottom of the table: revenue, Ebitda and earnings per share. Since the growth of Ebitda and earnings per share are significantly higher than revenue growth, we know the company is managing effectively and efficiently.
Investment returns were also strong, with an overall gain of 1.7% in the third quarter (6.8% annualized). It added, "Once again, equities led our portfolio higher with a 9.6% quarterly return, as very strong returns in July and August more than offset the declines seen in September."
Dividends and share buybacks
As this chart illustrates, Progressive has rapidly grown its dividend over the past three years:
Earlier in the decade, it reduced its share count:
Valuation
Normally, an insurance company selling for more than a price-book value of 1.0 would be considered expensive. Progressive's price-book ratio of 3.03 suggests it is overpriced.
But add to that an ROE of 35.53%, which is above average (see the green bars), and the story seems to be that investors are willing to pay extra for that kind of return.
The GuruFocus Value chart arrives at a fair valuation:
Its price-earnings ratio comes in at 9.12, which is low when compared with both its competitors/peers and its own history.
The PEG ratio, at 0.48, also provides a strong undervaluation signal, making the case that Progressive is not overpriced when Ebitda growth is considered.
Finally, here's a price chart for the past decade, including a trendline showing its average growth per year:
Gurus
Neither Buffett nor Rolfe held shares in Progressive at the end of the third quarter (Rolfe bought in the fourth quarter), but a dozen other gurus did. The three largest positions were those of:
- Pioneer Investments (Trades, Portfolio) with 5,254,223 shares at the close on Sept.30, giving the fund a 0.90% stake in Progressive and representing 0.52% of its own assets under management. During the quarter, Pioneer reduced its stake by 17.41%.
- PRIMECAP Management (Trades, Portfolio) held 2,368,260 shares after reducing its count by 4.32%.
- Glenn Greenberg (Trades, Portfolio) of Brave Warrior Advisors finished the quarter with 1,655,588 shares after cutting his holding by 6.48%.
Conclusion
Winning the praise of Buffett is a big vote of confidence for Progressive. That's backed up by solid fundamentals and profitability, as well as an articulated plan for continued growth. As noted, it should be able to keep taking market share from rivals.
Valuation is less straightforward. The price-book ratio comes in as high, but other metrics suggest a fair or undervalued share price. I'm inclined to the position that investors have been willing to pay something extra for the quality of the company or the size of its dividends.
Speaking of dividends, Progressive's is well above the average of the S&P 500 companies. But don't expect the payments to keep growing as they have in the past three years.
Income investors, obviously, will want to take a good look at the company, given the size and apparent safety of the dividend. Growth investors might give it some attention, too, based on its accelerated growth over the past four years. Value investors who can live with some debt may want to analyze it when it takes a serious dip.
Disclosure: I do not own shares in any of the companies named in this article and do expect to buy any in the next 72 hours.
Read more here:
- Sherwin Williams: A Profitability Powerhouse
- UnitedHealth: A Buffett-Munger Stock
- Kansas City Southern Sees Strong Growth in 2021 and 2022
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
