Auto insurance giant Progressive (PGR)’s stock peaked in December 2005 and then declined for 28 months. While PGR has rallied the past 6 weeks, Citi believes the stock is still a dog.
Bulls — Miles Driven Declining:
High oil prices are leading to fewer miles being driven as Americans try to conserve gasoline. The bull thesis states that fewer miles driven leads to fewer car accidents, which, in turn, leads to high profitability for Progressive.
Citi says the evidence for this theory is not compelling:
Statistical data crunching does not support a positive correlation between miles driven and accident frequency.
Furthermore, Citi is worried that the recession may do more bad than good for PGR:
While cash-strapped Americans may drive less, there is also likely higher delinquency and non-renewal of auto insurance policies, particularly among non-standard drivers, a core PGR client. Additionally, higher oil prices likely lead higher costs for tires and paint as well as a decline in oil change maintenance visits, all leading to higher loss severity.
In the end, Citi just plain doesn’t like PGR’s valuation.
Even if the bull thesis were to prove both true and meaningful, the current return on equity and growth prospects for Progressive suggest significant overvaluation.
We’re willing to buy the bull thesis: Fewer miles driven, fewer cars on the road, mean fewer accidents. But PGR clearly has other worries in a recession.