HSBC has upgraded Progressive to a Buy rating because it believes the stock has fallen too much and is now undervalued. The bank said Progressive has a lot of extra capital and more room to buy back its own shares, which adds support to the stock.
Progressive’s shares have had a rough few months. Since April, the stock has fallen far behind Allstate by about 26 per cent and behind the S&P 500 by roughly 36 per cent. This drop happened because the company saw slower growth in its personal auto policies, weaker price increases and pressure from falling interest rates.
Investor sentiment got even worse when Progressive set aside nine hundred fifty million dollars in September to give credits to Florida policyholders. HSBC thinks the company will need to reserve another two hundred million dollars in the fourth quarter.
HSBC said some of the decline makes sense given these issues. But now the stock trades at about thirteen and a half times expected earnings, which is close to its lowest level in ten years. It also trades at roughly a forty percent discount to the overall market. Because of this, the bank cut its price target slightly from two sixty seven to two fifty nine but still believes the shares are attractive enough to upgrade.
Analysts highlighted something important from Progressive’s third quarter earnings call. The company said it will not cut rates unless it actually sees growth. This shows discipline in a very competitive auto insurance market.
Progressive also got approval in two major states to lower the amount of capital it must hold. This frees up more money that can be returned to shareholders. The company said it plans to include buybacks in its capital strategy because it believes the stock is trading below what it’s truly worth.
HSBC expects Progressive to deliver strong returns on equity through twenty twenty eight. It also expects the company to build a large amount of excess capital on top of its regular shareholder payouts. Unless Progressive finds big investment opportunities, HSBC sees room for even higher returns.
The bank admitted that earnings growth will still be limited because pricing is soft and competition is strong. But it added that the recent drop in valuation gives investors a chance to buy in while the company focuses on controlled growth and increasing capital flexibility.