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 $65.75 per share and the market cap of $3.6 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.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Mercury General has a cash-to-debt ratio of 0.82, which is worse than 70% of the companies in Insurance industry. GuruFocus ranks the overall financial strength of Mercury General at 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:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Mercury General has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $4.1 billion and earnings of $11.21 a share. Its operating margin of 0.00% in the bottom 10% of the companies in Insurance industry. Overall, GuruFocus ranks Mercury General’s profitability as fair. This is the revenue and net income of Mercury General over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year 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 rate is 31.8%, which ranks better than 90% of the companies in Insurance industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Mercury General’s return on invested capital is 11.17, and its cost of capital is 3.96. The historical ROIC vs WACC comparison of Mercury General is shown below:
In closing, 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 90% of the companies in Insurance industry. To learn more about Mercury General stock, you can check out its 30-year Financials here.
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