Holding Back on Progressive

While 1Q08 results were a penny ahead of our expectations, results for The Progressive Company (PGR) were down year-over-year as rate reduction aid to the in premiums. Historically, PGR has been considered one of the best run and most profitable personal lines insurers in the industry, demonstrated by stronger premium growth and substantially higher ROE than most of its peers.

However, as the competition continues to intensify, premium and earnings growth has slowed, a trend that we expect to continue. Therefore, we reiterate our Hold recommendation on the shares of PGR.

Based on 1Q07 results, we are presently maintaining our fiscal year 2008 and 2009 EPS targets of $1.35 per share and $1.35 per share, respectively. At the current price, the shares of Progressive trade at 2.56x its 1Q08 book value of $7.01 per share. The company's multiple is currently 99 basis points above its peer group median (which is down approximately 120 basis points from six quarters ago, and down 1 basis point sequentially), reflecting its long track record of superior profitability.

Progressive's recent results showed the continuation of slow premium growth trends seen so far this year. Its underwriting results remain relatively favorable and consistent with prior months recorded results. PGR will face the challenge of offsetting the combined ratio deterioration with premium growth.

Based on an industry wide deceleration in personal line pricing, we think earnings growth of most of the participants may moderate and valuation multiples may through 2008 and into 2009 potentially. Depending on how well it will execute its strategy, PGR's upside is limited relative to its downside risk. At best, our new six-month price target of $19.05 per share (down from $19.60 per share) incorporates the current multiple of 2.5x our estimated book value of $7.62 per share as of September 30, 2008.

In addition, the quantitative Zacks Rank for PGR is currently 3 (up from rank 4 on January 28, 2008), indicating no directional pressure on the shares over the near term. Short interest ratio is 4.4 days, versus 4.9 days previously.

Chevron Won't Outperform Group

We are maintaining our Hold rating on Chevron (CVX) shares ahead of the company's first-quarter results, but raising our earnings estimates to reflect the company's strong upstream outlook due to continued strength in oil and natural gas prices.

While Chevron no doubt has a fairly impressive inventory of upstream development projects that will drive volume gains and reserve additions in the long run, it does not compare favorably with its peers in the near to medium term.