Progressive, a home-and-auto insurer, has managed to surpass the stock market consistently while maintaining minimal volatility within the S&P 500.
Stable Growth and Low Volatility
According to Josh Shanker, a senior insurance analyst with BofA Securities, Progressive stands out as a top performer with an impressive compound annual growth rate (CAGR) of 25%-26%. Despite Nvidia’s remarkable CAGR of 69%, Progressive’s stability is evident in its beta of 0.67, positioning it in the lowest quintile of volatility among $100 billion+ companies in the S&P 500.
Consistent Performance and Potential Growth
Over the past year, Progressive has shown a declining daily trading beta of just 0.21, indicating reduced volatility in comparison to other stocks. With the stock trading around $188.00 and a Buy rating from Shanker, who has upped the price target to $261.00, Progressive is poised for substantial growth.
Undervalued Opportunity
BofA notes that while the S&P 500 is trading at 18.9 times 2025 consensus earnings per share, Progressive trades at 17.7 times consensus numbers, suggesting a potential upside of 31%. Despite concerns about stock valuation, Progressive’s shares remain within its historical range, offering an attractive investment opportunity.
In conclusion, Progressive emerges as a standout stock in the S&P 500, combining stable returns with low volatility, making it an appealing choice for investors seeking growth and stability.
Debunking Misconceptions about Progressive Stock Valuation
The argument that 17.7 times the 2025 consensus EPS is too much to pay for a stock like Progressive has been deemed flawed by BofA for several key reasons.
Historical Perspective
- 17.7 times is not historically expensive.
- The average price-to-earnings multiple over various periods (1-year,2-year, 3-year, 5-year, and 10-year) has been around 18.0x, 18.4x, 18.4x, 16.9x, and 16.1x respectively.
Changing Trends in Stock Valuation
- Stocks, in general, are now more expensive than before.
- Progressive’s shares are currently trading at 93% of the S&P 500’s P/E multiple of 18.9 times.
- The average relative P/E multiple over different periods shows an increasing trend – 100%, 107%, 101%, 94%, and 95%.
Higher Earnings Forecast
- BofA believes that consensus numbers are undervalued.
- Their above-Street forecast of $13.85 for earnings per share in 2025 is significantly higher (31%) than the consensus of $10.60.
- If the Street’s forecast aligns with theirs, Progressive’s shares would only be trading at 13.5 times the 2025 EPS and 71% of the S&P 500’s P/E multiple.
Progressive’s Trading History
- BofA asserts that Progressive’s trading multiples have been consistently underestimated.
- Despite not being more expensive on an earnings valuation basis, historical multiples failed to reflect the true value of the business.
In summary, Progressive’s impressive 25%-26% Compound Annual Growth Rate (CAGR) over the past decade clearly indicates that investors should have been willing to pay a higher multiple in the past. As the stock continues to outperform, it is essential for investors to reconsider previous valuation misconceptions.
