Thursday, Credit Suisse downgraded Progressive Corp. (PGR) shares to Underperform from Neutral with a price target of $18.
Analyst Misquith downgraded the stock due to relative valuation and concerns about top line and earnings growth. The stock's relative valuation vs. the P&C industry and Allstate is now above historical average levels despite the company's expected 2010 ROE spread vs. the US P&C industry and Allstate being at or below the historical average.
The analyst acknowledges that Progressive's ROE spread vs. the P&C industry will expand in 2011, though he believes it will be close to historical averages. For Allstate, improvement in ROE on the homeowners' business implies that the ROE spread vs. Progressive could contract in 2011. The analyst's price target remains at $18, equal to 12 times estimated 2010 earnings and 2 times 4Q10 book value per share. PGR continues to trade at a significant premium to auto insurance peers based on price to book valuation.
The analyst believes a premium to peers is justified considering the company's superior ROE (17%), though at the current valuation, he believes the stock is fully valued. While the company's growth prospects have improved vs. the past, the analyst believes top line will grow in the mid single digits in 2010, significantly lower than the 20%-30% in the past, implying that the stock is fully valued at current levels.
While profitability is strong and the company gained market share due to increased shopping for lower priced policies, the analyst does not believe the top line will grow significantly to justify a higher valuation. Also, the analyst believes that customer shopping will likely decline from recent elevated levels as the economy improves, slowing further market share gains.
Currently, PGR is down $0.29 or 1.63% and trading at $17.50.
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