WSB wants more DD? Then say no more. PGR is an insurance company that has millions of policies in force but which faced strong headwinds the last few months/year; headwinds which will continue into the foreseeable future.
TL DR: costs of claims are going up and inflation is making sure they aren't coming down any time soon.
- This is strictly an earnings play (quick adventure Morty, in and out!)
- PGR is by all measures a well run company whose stock appreciation over time speaks for itself.
- With time, there's no reason to think that they can't continue to perform well in whatever market conditions their.
- For now, increased costs in the insurance business due to inflationary pressure is real and it's going to hurt the bottom line.
- Their earnings in a couple of weeks could very well miss expectations and their forward guidance for 2022 may not be strong. If this turns out to be true, look for a pull back on their stock price.
- What PGR insures
- Auto/vehicles and property
- What's impacting the costs involved in their business?
- 2020 is gone and people are out and about and driving more. More driving means more accidents. More accidents is bad for business.
- Accidents cause costs to rise through vehicle repairs.
- Costs in providing rentals go up.
- Costs in paying for injuries go up.
- On the property side, hurricanes like IDA and other massive storms cause significant losses and cost increase to PGR. And they aren't getting better. Things like climate change which can make storms more frequent or sever are only going to get worse based on what climate change science is telling us.
- On top of that, inflation is hitting this business bad.
- Vehicles are significantly more expensive and continuing to rise in costs.
- Parts for fixing vehicles are more expensive and oh guess what? These parts aren't even here half the time because of shipping delays and supply issues.
- If parts are delayed that means that people need more time in rental vehicles which means more $$$ being shelled out by PGR.
- And hurricanes like Hurricane IDA and other weather related issues aren't making things any better. Everyone on this sub knows how expensive housing material has become and inflation in that industry is just as bad as are supply chain issues.
- Wage inflation is also going to be contributing to their costs. Grocery bills have skyrocketed and wages will be increased to some extent to account for that.
- Okay so expenses are through the roof, but where are we with current valuations and how do they compare to peers?
- PE/Market Cap(Billions)/Revenue(Billions)
- PGR 19.3/64.1/47.7
- TRV 11.9/41.5/34.8
- CB 10.5/86.3/40 round about from prior 4 quarters
- ALL 10.9/34.9/50.6
- PGR clearly has a premium on their peers which in prior years was deserved due to better business execution. But given the current environment I don't think it's going to be justified.
- Back to Costs, Are they going to be profitable?
- Almost assuredly, but less so than expected.
- They measure their profitability based on their underwriting margin. Anything less then 100% means that they were profitable.
- The last 3 months of 2021 their ratio consisted of (Oct/Nov/Dec) 97.2, 91.9, 94.6. Compare that to the same Q in 2019 (nobody drove in 2020 so that's going to be an outlier of profitability) 94, 94.1, 89.4. All but one month is significantly higher.
- What about earnings?
- Comparing the 10Q from 2019 and 2021 for the first 9 months of each year we see that net income (billions) was 2,899.5 in 2019 and 2,388.6 in 2021.
- One more thing to think about in earnings is how well have their investments done? Insurance companies invest extra money they get from policy holders that doesn't get paid out. With the volatility in this market, it's completely possible they made misses or just went low volatility and lost gains. This will also potentially impact their earnings negatively.
- Costs are up, net income is lower now than it was two years ago, these trends are likely to persist going forward.
- Price Targets
- I'll let the pros give that to you, I'm not going to pretend like I know what I'm doing here.
- What could go wrong?
- Management has shown in the past they can execute well and it's entirely possible they over perform and give strong guidance for 2022.
- Their CEO is arguably one of the best.
- As Heisenberg says, "tread lightly"
3/18 100 P
3/18 105 P
You can find all of this info through their 10q and 8k forms published on their website. You should probably read through their earnings publications as well, lot's of good info in there.