Make the Switch, Even Flo Would Say So
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Progressive Corporation (NYSE: PGR) is a company that I've had experience with before for my personal auto insurance. I would suggest that my readers make the same change that I made when I switched to Geico. I would suggest that Progressive investors also make the switch to Geico's owner, which is Berkshire Hathaway (NYSE: BRK-B).
I'll admit, when Progressive first came out with the Flo character for their commercials, she was kind of annoying. Over time the character has grown on me, and has become an expected sight in each commercial that the company produces. Whether I like it or not doesn't matter, because apparently the advertising is working, as a company is selling more policies. The problem seems to be as the company sells more policies, their investments drag down results. Just for point of reference, net premiums written increased by 8% in the current quarter, but net income was down over 50% due primarily to investment performance.
To say the company's investment decisions have hurt overall performance, would be a massive understatement. For example, policies in force in all major lines of business increased this last quarter. Agency sales of auto policies were up 6%, and direct auto sales were up 7%. The company's total special lines policies increased 5%, while commercial auto insurance increased 3%. It's true that the company saw an increase of 12% in expenses related to losses in the insurance business. However, most of the losses, were from the investment side of the house. Investment income dropped 7% year-over-year, and realized gains on securities dropped by $50 million versus last year. The only thing that made earnings-per-share a little better, was the fact that the company retired about 6% of outstanding shares versus last year. With the company paying an average price of $20.90 to retire the shares, investors have the opportunity to purchase shares in Progressive for less than what the company just paid. Progressive is expected to grow earnings by about 7% annually over the next few years. More than this quarter's performance, this unimpressive future growth is what causes me to suggest investors look elsewhere.
Two direct competitors, Allstate (NYSE: ALL) and Geico, are expected to see growth in the future at a rate greater than Progressive. In Allstate's case, investors can buy the company for roughly half the forward P/E ratio of Progressive. However, Allstate investors can expect a growth rate of 9%, versus less than 7% at Progressive. In my eyes, an even better choice is to purchase Berkshire Hathaway, specifically the class B shares. While the company does not pay a dividend, the future earnings growth, and balance sheet quality both far exceed Progressive. Berkshire is expected to grow earnings by nearly twice the rate that Progressive is going forward. For this higher growth rate, investors are only paying a slight premium in price, based on the company's forward P/E ratio. In addition, Berkshire has the strongest equity to asset ratio of all three companies. With a ratio of 0.42, versus Progressive's equity to asset ratio at 0.28, you can see the Berkshire has a much stronger balance sheet. Most investors know that Berkshire's investment portfolio is one of the most well-known in the world. While some investors might be concerned about Warren Buffett's age, the investments that have already been made, generate significant cash flow from dividend payments alone. As Warren Buffett has quipped before, he likes companies that "could be run by a ham sandwich". Unless Warren Buffett's successor is royally stupid, and changes the existing portfolio, a ham sandwich could indeed run this company.
In the same way that my auto insurance is no longer with Flo's company, investors of Progressive should give serious consideration to switching their investment dollars to Geico's parent as well. After all, Berkshire Hathaway offers: nearly twice the growth rate, almost the same valuation, a much stronger balance sheet, and there is that one thing about the most famous investor of all time.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services recommend Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.