Citi Downgrades Progressive To Sell

Citi has downgraded Progressive Corp

to Sell from Neutral , saying that consensus expectations for the auto insurer is "too optimistic" amid potential deterioration in margins. "It's well understood that Progressive is going through a growth spurt, and as competitors such as Allstate, Geico and others re-price, top line growth will accelerate at Progressive. What isn't well understood is that margins should deteriorate materially early on, as Progressive books new business at a combined ratio of around 129%," analyst James Naklicki wrote in a note. Naklicki highlighted that the market seems to be assuming about a 1 point deterioration in underlying margins over the balance of the year, which may not be enough. "As such, we assume EPS of $1.15 per share over the final 8 months of the year, a 9-10% decline, and expect the stock to grind downward as consensus moves lower," Naklicki noted. The analyst expects the total 2016 combined ratio to come in closer to 95 percent versus 94.4 percent consensus. He also cut his 2016 EPS view by $0.20, to $1.65, well below consensus' $1.83. However, Naklicki sees an improvement in profitability in 2017 as the underlying margins should begin to improve, as new members are seasoned, and Progressives assumes a lower loss ratio on the policyholders. The analyst also cut the price target on the stock to $31 from $36. At the time of writing, shares of Progressive fell 0.90 percent to $33.10.