The Progressive Corporation (NYSE:PGR) is currently trading at a trailing P/E of 19.1x, which is higher than the industry average of 15.2x. While PGR might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Progressive
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for PGR
Price-Earnings Ratio = Price per share ÷ Earnings per share
PGR Price-Earnings Ratio = $61.91 ÷ $3.243 = 19.1x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as PGR, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 19.1x, PGR’s P/E is higher than its industry peers (15.2x). This implies that investors are overvaluing each dollar of PGR’s earnings. Therefore, according to this analysis, PGR is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that PGR should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to PGR. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with PGR, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing PGR to are fairly valued by the market. If this is violated, PGR’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on PGR, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for PGR’s future growth? Take a look at our free research report of analyst consensus for PGR’s outlook.
- Past Track Record: Has PGR been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of PGR’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.