The stock of Mercury General (NYSE:MCY, 30-year Financials) gives every indication of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $61.57 per share and the market cap of $3.4 billion, Mercury General stock shows every sign of being modestly overvalued. GF Value for Mercury General is shown in the chart below.
Because Mercury General is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 3.5% over the past five years.
Link: These companies may deliever higher future returns at reduced risk.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Mercury General has a cash-to-debt ratio of 0.84, which is worse than 69% of the companies in Insurance industry. The overall financial strength of Mercury General is 5 out of 10, which indicates that the financial strength of Mercury General is fair. This is the debt and cash of Mercury General over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Mercury General has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $3.8 billion and earnings of $6.77 a share. Its operating margin is 0.00%, which ranks in the bottom 10% of the companies in Insurance industry. Overall, the profitability of Mercury General is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Mercury General over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Mercury General is 3.5%, which ranks in the middle range of the companies in Insurance industry. The 3-year average EBITDA growth is 31.8%, which ranks better than 91% of the companies in Insurance industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Mercury General's ROIC is 6.97 while its WACC came in at 4.15. The historical ROIC vs WACC comparison of Mercury General is shown below:
To conclude, the stock of Mercury General (NYSE:MCY, 30-year Financials) appears to be modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 91% of the companies in Insurance industry. To learn more about Mercury General stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
