Richard Aster on Legget & Platt, Mercury General Corp and Hawaiian Electric Industries
Legget & Platt (LEG), one of our larger holdings, produces many of the metal parts, foams, fibers and other specialty fixtures necessary for the manufacture of residential and commercial bedding, furniture and many other related items. Business has been sluggish recently due to the decline in the housing and remodeling market. Leggett is in strong financial condition, has improved its market position, reduced costs and is poised to resume growth as soon as the home furnishing environment stabilizes, which should be sometime in 2009. The shares sell at 1.4 times book and yield 5.7% which, in our opinion, represent a positive risk reward ratio.
Mercury General Corp (MCY), one of our larger holdings, primarily engages in writing automobile and homeowner insurance in California which accounts for 67% and 13% of total policies-in-force, respectively. The company is the second largest automobile insurer in California with about 10% market share. Mercury has a limited presence in several other states, including New Jersey, Arizona, Pennsylvania and Nevada. Management is in the process of implementing improved systems, controls and underwriting procedures before taking on additional business outside of California. We believe that expansion outside California however, will eventually be a major driver of future growth. Mercury’s investment portfolio is fairly conservative and largely comprised of state and municipal bonds. The company has an experienced management team with a strong track record and is well positioned to grow, especially when the insurance market improves. The shares sell at a reasonable valuation, have a strong balance sheet and financial returns and yield in excess of 5%.
Hawaiian Electric Industries, Inc. (HE), one of our larger holdings, is the dominant electric utility in Hawaii. Earnings declined in 2006 and 2007 as years of strong economic growth in Hawaii spurred high demand for electricity that outstripped the company’s infrastructure, leading to elevated operating and maintenance costs. Earnings resumed growth in 2008 as rate increases now cover some of these increased operating costs, and further relief should come in 2009 and 2010 as new generating capacity comes online and earns double-digit returns on investment.We expect earnings to grow from estimates of $1.69 per share this year to $2.50 per share or more over the next 3 to 5 years. We believe the stock is a compelling value at roughly 10 times normalized earnings and with a current dividend yield close to 5%.
During the quarter we purchased shares of Carters, Harley-Davidson, Jackson Hewitt Tax Service and Kraft Foods.We sold our positions in BP, Barr Pharmaceuticals, Anheuser-Busch, Gol Linhas Aereas Intel and Hanesbrands. Also International Game Technology and VeriSign.