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 auto insurance, commercial auto and truck insurance principally for small businesses, and other specialty property-casualty insurance and related services. The Company’s property-casualty insurance products protect its customers against losses due to collision and physical damage to their motor vehicles, uninsured and underinsured bodily injury, and liability to others for personal injury or property damage arising out of the use of those vehicles. Its non-insurance subsidiaries and limited partnership investment affiliate support its insurance and investment operations.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of PGR – August 2015
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass all 6 of the following tests. | |||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | Pass | |
| 2. Earnings Stability | Positive EPS for 10 years prior | Fail | |
| 3. Dividend Record | Dividend Payments for 10 years prior | Fail | |
| 4. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | Pass | |
| 5. Moderate PEmg Ratio | PEmg < 20 | Pass | |
| 6. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | Pass | |
| Score | |||
| Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor. | |||
| 1. Earnings Stability | Positive EPS for 5 years prior | Pass | |
| 2. Dividend Record | Currently Pays Dividend | Pass | |
| 3. Earnings Growth | EPSmg greater than 5 years ago | Pass | |
Stage 2: Determination of Intrinsic Value
| EPSmg | 1.91 |
| MG Growth Estimate | 5.87% |
| MG Value | $38.57 |
| Opinion | Fairly Valued |
| MG Value based on 3% Growth | $27.64 |
| MG Value based on 0% Growth | $16.20 |
| Market Implied Growth Rate | 3.96% |
| Current Price | $31.30 |
| % of Intrinsic Value | 81.15% |
Progressive Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings stability over the last ten years as well as the inconsistent dividend record.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.
As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.37 in 2011 to an estimated $1.91 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 3.96% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.
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.
Stage 3: Information for Further Research
| PEmg | 16.42 |
| PB Ratio | 2.51 |
| Dividend Yield | 2.19% |
| Number of Consecutive Years of Dividend Growth | 2 |
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Most Recent Balance Sheet Figures
| Long-Term Debt | $2,739,000,000 |
| Total Assets | $29,304,200,000 |
| Intangible Assets | $998,900,000 |
| Total Liabilities | $21,944,400,000 |
| Shares Outstanding (Diluted Average) | 589,500,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $1.93 |
| Dec14 | $2.15 |
| Dec13 | $1.93 |
| Dec12 | $1.48 |
| Dec11 | $1.59 |
| Dec10 | $1.61 |
| Dec09 | $1.57 |
| Dec08 | -$0.10 |
| Dec07 | $1.65 |
| Dec06 | $2.10 |
| Dec05 | $1.74 |
| Dec04 | $1.91 |
| Dec03 | $1.42 |
| Dec02 | $0.75 |
| Dec01 | $0.46 |
| Dec00 | $0.05 |
| Dec99 | $0.33 |
| Dec98 | $0.51 |
| Dec97 | $0.44 |
| Dec96 | $0.34 |
| Dec95 | $0.27 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $1.91 |
| Dec14 | $1.85 |
| Dec13 | $1.68 |
| Dec12 | $1.44 |
| Dec11 | $1.37 |
| Dec10 | $1.30 |
| Dec09 | $1.22 |
| Dec08 | $1.19 |
| Dec07 | $1.81 |
| Dec06 | $1.79 |
| Dec05 | $1.50 |
| Dec04 | $1.23 |
| Dec03 | $0.79 |
| Dec02 | $0.46 |
| Dec01 | $0.33 |
| Dec00 | $0.29 |
| Dec99 | $0.40 |
Recommended Reading:
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.
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