Founded in 1961, Mercury General (NYSE: MCY) is an insurance powerhouse that operates through independent agents across 11 states, with California as its home turf and biggest market.
While it’s primarily in the personal auto insurance business, Mercury also offers homeowners, commercial auto, and property insurance.
Insurance may not be the most exciting industry, but it’s good business. Mercury’s shareholders have enjoyed a serious rally over the past year, with the stock more than doubling from its late 2023 low.
Despite this huge surge, there are compelling reasons to believe this insurance heavyweight may still be trading at a good bargain.
First, let’s look at Mercury’s enterprise value-to-net asset value (EV/NAV) ratio. This key metric sits at a modest 2.06, compared with an average of 10.95 for companies with positive net assets. In other words, you’re getting a whole lot more bang for your buck with Mercury than you would with most of its peers.
Now let’s turn to cash flow. Mercury has consistently generated positive free cash flow for years, and its free cash flow has averaged 9.98% of its net assets over the past four quarters. The average for companies with four straight positive quarters is 7.97%, so Mercury is outperforming its peers in this crucial area.
The company’s latest quarterly results confirm that it’s making serious waves. Its total revenue collected in premiums surged 27.2% year over year to nearly $1.3 billion. That’s a big deal in the insurance world. It’s like a retailer reporting 27% sales growth.
And it’s not just the top line that’s looking good. The company’s combined ratio, a key measure of profitability for insurers, improved from 115.8% in the first quarter of 2023 to 100.9% in Q1 of this year. In insurance speak, that’s like going from losing money on every policy to breaking even. It’s a massive turnaround, and it shows that Mercury is getting its house in order.
Management isn’t resting on its laurels either. They’re actively working to improve profitability, having gotten rate increases approved in California for both their auto and homeowners insurance lines.
As these rate hikes take effect, we could see Mercury’s profitability shift into high gear.
But wait, there’s more! Mercury is also serving up a 3.2% dividend yield with a payout ratio of just 25.7% of its forward earnings. That impressively low payout ratio suggests that the dividend is very sustainable.
The bottom line? Mercury General is looking like a classic value play. It’s a solid company with improving fundamentals that is trading at a fraction of what it seems to be worth.
Of course, no investment is without risk. The insurance industry can be volatile, and there’s always the chance of unexpected catastrophes or regulatory changes. But thanks to Mercury’s low valuation, attractive dividend, and improving fundamentals, the potential reward seems to far outweigh the risks. In my book, this is shaping up to be a rare opportunity.
Mercury General is exactly the sort of overlooked, undervalued stock we’re aiming to identify. The Value Meter rates the stock “Slightly Undervalued,” with its score leaning more toward the “Extremely Undervalued” end of the spectrum.
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