Progressive (NYSE:PGR) is a highly innovative insurance company — for example, about a decade ago, it empowered claims adjusters to issue checks to policyholders at an accident scene. And its CEO, Peter Lewis, is famous — among other things — for being a supporter of legalizing marijuana.
With its most recent earnings falling short of expectations, perhaps he should focus a bit more on business. Does this mean you would be better off investing in its more conservative peer, Allstate (NYSE:ALL)?
Progressive missed expectations by a mile in the previous quarter, and analysts were expecting more bad news in its current quarter. But its report on Wednesday morning was still worse than expected, at least on the bottom line. The company posted a profit of 24 cents a share, missing Wall Street expectations by 4 cents.
The causes of Progressive’s disappointing results were quite predictable. That’s because in its earnings report two month ago Progressive’s net income fell 66% on a one-two punch of a $35.7 million loss on securities — over twice the loss in the previous year — and a $37 million loss due mostly to Hurricane Irene.
Meanwhile, Allstate is taking some aggressive steps to broaden its service offerings. On Oct. 7, it closed a $1 billion worth of acquisitions to acquire Esurance and Answer Financial from White Mountain Insurance.
Allstate expects this deal to broaden its appeal to different groups of customers — self-directed business and consumer insurance buyers. How so? According to Allstate, “Esurance provides the business platform to serve the self-directed, brand-sensitive market segment. Answer Financial strengthens our offering to self-directed consumers who want a choice between insurance carriers.”
Does this mean you should buy Allstate and avoid Progressive?
- Progressive: barely growing, profitable company; somewhat overpriced stock. Progressive’s revenue inched up 2.7% to $15.4 billion in the last year while its net income rose 1% to $1.2 billion yielding a solid 7.8% profit margin. But its price/earnings-to-growth ratio is a slightly pricey 1.27 (where a PEG of 1.0 is seen as fairly value) with a P/E of 10.3 on earnings forecast to grow 8.1% to $1.60 a share in 2012.
- Allstate: shrinking, barely profitable company, dirt cheap stock. Allstate’s revenue was down 1.9% in the last year to $32.2 billion and its net income rose 8.7% to $562 million, while it earned a slim 1.7% net profit margin. And its PEG is very inexpensive 0.08 on a P/E of 23.4 with earnings forecast to grow 292% to $3.70 a share in 2012.
Like the insurance business, stock investing is all about weighing risks and returns. And if you believe that Allstate can rebound so much in 2012, its stock is a screaming buy. Meanwhile, Progressive looks a bit pricey and an 8.1% growth rate would be much higher than its recent earnings growth record. I’d wait on buying its stock.
Peter Cohan has no financial interest in the securities mentioned.