Wednesday, October 12, 2011

Allstate Can Insure Your Net Worth If Growth Spikes

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.

And 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. Specifically, it reported EPS of $0.35 a share -- a whopping 12.5% below expectations.

And for the latest quarter, analysts were expecting Progressive to report bad news. But its actual report Wednesday morning was even worse than they had expected. Specifically analysts were looking for EPS of $0.29 a share on sales of $3.9 billion -- that expected EPS was 21.6% below its 2010 actual level while the revenue figure was $100 million higher than the year before.

But its actual earnings report was a bigger-than-expected 42% below 2010 on investment losses and higher catastrophe losses. Progressive reported a profit of $0.24 a share -- a nickel less than expected. And its net realized investment losses of $52.6 million compared unfavorably to its prior year's $26.9 million worth of investment gains.

The causes of Progressive's disappointing results were quite predictable. That's because in its most recent report before Wednesday -- an unusual monthly earnings report for August 2011 --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 October 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 over-priced stock. Progressive revenues 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 (PEG) -- 1.0 is fair value -- is a slightly pricey 1.27 with a P/E of 10.3 on earnings forecast to grow 8.1% to $1.60 in 2012.
  • Allstate: shrinking, barely profitable company, dirt cheap stock. Allstate revenues are 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 in 2012.
Like insurance, investment 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.


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