Stock Analysis & Ideas

Progressive: Why Boring can Sometimes be Better

Story Highlights

As an insurance firm best known for its commercial auto protection solutions, Progressive isn’t exactly the most riveting business. However, the unique dynamics associated with the new normal bolster the bullish case for PGR stock.

While providing an important service to society, insurance firms like Progressive (PGR) don’t often capture the limelight. However, the unique challenges that the COVID-19 pandemic imposed makes the company and the underlying sector incredibly relevant. I am bullish on PGR stock.

Undergirding the fundamental narrative of the insurance industry is a secular derivative of Pascal’s wager. While the original philosophical argument centered on the economic rationality of believing in a supreme divinity in an ultimate bid to avoid perdition, insurance firms apply the same logic but in a scaled-down manner: helping clients avoid the infernal financial consequences of events gone awry.

To put it in colloquial terms, it’s better to have insurance and not need it, than to need insurance and not have it.

In the world of auto insurance – Progressive’s core specialty – drivers never really know what lies ahead on the road. From criminal elements to drunk drivers to suddenly materialized traffic hazards, anything and everything can happen. Further, the disaster that is the COVID-19 crisis established the need for protection against unpredictable variables.

Fiscally as well, PGR stock makes sense under the new normal. Overall, Progressive features a generally stable balance sheet and some notable strengths in its income statement, particularly a return on investment (ROE) of 11.94%, conspicuously higher than the insurance industry median of 8.35%.

Plus, shares of insurance firms tend to rise in direct correlation with interest rates, reflective of the increased profitability potential that an environment of ascending borrowing costs brings. Even more impressive, though, two fundamental catalysts help drive the bullish case for PGR stock.

On TipRanks, PGR scores a 5 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to outperform the broader market.

PGR Stock and the Surge in Car Accidents

Back during the initial onslaught of the SARS-CoV-2 virus, once thriving metropolitan areas such as Los Angeles and New York seemingly turned into ghost towns. With government agencies issuing stay-at-home orders and crackdowns on non-essential businesses and activities, formerly hectic roadways became virtually empty parking lots.

Under this unprecedented circumstance, several insurance firms took the unusual step of refunding premiums to policyholders. However, the goodwill between big business and the common person didn’t last too long, in large part because societal normalization brought in a wave of serious traffic accidents.

According to data from the Department of Transportation’s National Highway Traffic Safety Administration (NHTSA), traffic fatalities jumped 18.4% in the first half of 2021 against the year-ago comparison. Moreover, the American Automobile Association reported an increase of in crashes involving impairment, speeding, red-light running, aggressiveness, and non-seatbelt use.

Observers have forwarded many theories about the rise in serious car accidents during the new normal, including “pandemic rage.” Whatever is causing the spike in risks on the road, the reality is that driving has become a much more hazardous activity. Therefore, it behooves drivers to protect themselves with the strongest coverage available.

Thanks to Progressive’s compelling marketing campaign featuring the fictional salesperson character Flo, PGR stock stands a good chance of continuing to march higher this year.

A Broader Total Addressable Market

The other fundamental catalyst to consider when conducting due diligence on PGR stock is the grand work-from-home experiment. At the time of the COVID-19 breakout, granting telecommuting privileges was a necessity for companies to stay operational. Today, it’s becoming a source of friction between management and workers.

Generally, it comes down to the fact that the American Management Association before the pandemic conducted a survey, where it discovered that the average employee was wasting more than two hours per day while on the clock. At scale, the collective time-wasting leads to billions of dollars of lost productivity annually.

Corporate executives are not naïve to the reality that when the cat is away, the mice like to play. And therefore, if the cat isn’t even in the house, the mice will be even more incentivized to goof off.

As if managers didn’t have enough reasons to be suspicious of their subordinates’ claimed productivity increases, a report published by medical journal Frontiers indicated that a growing body of research suggests an unprecedented consumption of what may be politely referred to as fabric-free content.

In other words, for hours in a day, workers are away from their desks. When they are at their desks, they’re doing something other than work. At some point, companies will at least audit telecommuting patterns to ensure productivity goals are met.

From established trends, they on average won’t be met. This would translate to more people on the road (due to the elimination of telecommuting privileges), which indirectly supports PGR stock.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, PGR is a Hold, based on two Buys, seven holds and four sell ratings. The average Progressive price target is $111.85, implying 4.74% downside potential.

Follow the Logic

Generally speaking, insurance-related investments like PGR stock rise alongside interest rates, due to the expansion of profitability associated with lending services. However, Progressive being a dominant player in the auto insurance sector is compelling right now due to higher traffic accidents and the likely increase in drivers on the road.

Disclosure.

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