Progressive Corporation Quarterly Valuation – November 2014 $PGR

In the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period.  Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation.  We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before.  By continuing to require the same standards for the historical period, Intelligent Investors are able to whittle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment.  In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Progressive Corporation (PGR) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Progressive Corporation is an insurance holding company. The Company’s insurance subsidiaries and mutual insurance company affiliate provide personal and commercial automobile insurance and other specialty property-casualty insurance and related services. Its personal lines business includes insurance for personal autos and special lines products (such as motorcycles, all terrain vehicles (ATVs), recreational vehicles (RVs), mobile homes, watercraft and snowmobiles). Its Commercial Auto business offers products in 49 states. Its Claims business area is organized into four groups. Three of the groups are based on geographic region, and one is a nationwide group that provides various claims-related services, including catastrophe response and special investigations. Its non-insurance subsidiaries and limited partnership investment affiliate generally support its insurance and investment operations.

Defensive Investor – must pass all 6 of the following tests: Score = 3/6

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
3. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
5. Moderate PEmg ratio – PEmg is less than 20 - PASS
6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

1. Earnings Stability – positive earnings per share for at least 5 years – PASS
2. Dividend Record – currently pays a dividend – PASS
3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price	$27.20
MG Value	$29.25
MG Opinion	Fairly Valued
Value Based on 3% Growth	$24.36
Value Based on 0% Growth	$14.28
Market Implied Growth Rate	3.85%
PEmg	16.19
PB Ratio	2.33

Balance Sheet – September 2014

Total Debt	$2,164,000,000
Total Assets	$25,926,000,000
Intangible Assets	$0
Total Liabilities	$18,991,000,000
Outstanding Shares	593,700,000

Earnings Per Share

2014 (estimate)	$1.65
2013	$1.93
2012	$1.48
2011	$1.59
2010	$1.61
2009	$1.57
2008	-$0.10
2007	$1.65
2006	$2.10
2005	$1.74
2004	$1.91

Earnings Per Share – ModernGraham 

2014 (estimate)	$1.68
2013	$1.68
2012	$1.44
2011	$1.37
2010	$1.30
2009	$1.22

Dividend History

Conclusion:

Progressive Corporation qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the inconsistent dividend history, and the lack of earnings growth or stability over the last ten years, while the company passes all of the Enterprising Investor’s requirements.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears fairly valued after growing its EPSmg (normalized earnings) from $1.30 in 2010 to an estimated $1.68 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 3.85% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the market price.

Be sure to check out previous ModernGraham valuations of Progressive Corporation (PGR) for a broader perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Progressive Corporation (PGR)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Progressive Corporation (PGR) or in any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.