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Citi’s James Naklicki believes expectations that the consensus EPS and margin estimates for 2016 for Progressive Corp (NYSE: PGR) were too high, given the new business penalty, had played out. Therefore, Naklicki sees the stock as having been revalued lower.
Naklicki upgraded the rating on the company from Sell to Neutral, while raising the price target from $30 to $34.
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Consensus Expectations Too High
“Consensus 2016 EPS expectations of $1.83 in June now seem more realistic at $1.53. Moreover, PIF growth in September missed our forecast by about 50,000 implying the new business penalty wasn’t as severe,” the analyst explained.
In addition, there was upside to the AY loss ratio, which could be indicative of more favorable loss trends.
Naklicki believes Progressive has been experiencing a “growth spurt,” and if margin pressure wanes in 2017, the stock could move meaningfully higher.
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2017 Expectations
However, the analyst also pointed out that in order to achieve the 2017 EPS estimate of $2, the company would need to “dramatically improve margins.”
Naklicki expects the underlying combined ratio to improve in 2017 by about $0.25 per share to 92.2 percent, as the new business penalty subsides, higher loss trends from Q2:16 normalize and the commercial auto business is re-priced.
“For us to get even more constructive on Progressive, we’d have to make a case for upside to the $2.00 consensus forecast in 2017, which already assumes 32 percent growth in earnings,” the analyst added.
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New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.