Progressive sell off has gone too far as capital returns build, says HSBC

Investing.com -- HSBC raised Progressive Corp to Buy, saying the insurer’s sharp underperformance has left the stock undervalued given its surplus capital and rising scope for buybacks.

Progressive has trailed Allstate by about 26 percent and the S&P 500 by about 36 percent since April, weighed down by slower policy growth in personal auto, weaker pricing gains and falling interest rates.

Sentiment was further hit after the company set aside 950 million dollars in September for credits to Florida policyholders and HSBC expects another 200 million dollars in the fourth quarter.

HSBC said the weaker backdrop explained part of the decline but added that the stock now trades on about 13.5 times forward earnings, near its 10 year trough, and at a roughly 40 percent discount to the broader market.

The broker cut its price target to 259 dollars from 267 dollars but said the valuation and capital return prospects justify an upgrade.

Analysts pointed to comments on the third quarter earnings call that the company will not cut rates without seeing growth, a move which signals discipline in a competitive personal auto market.

Progressive also received approval in two large states to reduce required capital levels, freeing up funds for returns. Management added buybacks to its capital plans, saying the stock trades below its view of fair value.

HSBC expects the company to generate strong returns on equity through 2028 and to build substantial excess capital on top of regular payouts. It sees scope for still higher returns unless the company finds opportunities to redeploy funds.

The broker maintained that earnings growth remains constrained by muted pricing momentum and competition but said the valuation reset provides an entry point as Progressive balances disciplined growth with rising capital flexibility.