The past six months have been a windfall for Mercury General’s shareholders. The company’s stock price has jumped 44.2%, hitting $77.87 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Mercury General, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Mercury General Not Exciting?
Despite the momentum, we're swiping left on Mercury General for now. Here are three reasons we avoid MCY and a stock we'd rather own.
2. Growing BVPS Reflects Strong Asset Base
We consider book value per share (BVPS) a critical metric for insurance companies. BVPS represents the total net worth per share, providing insight into a company’s financial strength and ability to meet policyholder obligations.
Although Mercury General’s BVPS increased by a meager 1.6% annually over the last five years, the good news is that its growth has recently accelerated as BVPS grew at an impressive 18.6% annual clip over the past two years (from $25.29 to $35.56 per share).
3. Previous Growth Initiatives Haven’t Impressed
Return on Equity, or ROE, ties everything together and is a vital metric. It tells us how much profit the insurer generates for each dollar of shareholder equity entrusted to management. Over a long period, insurers with higher ROEs tend to compound shareholder wealth faster through retained earnings, buybacks, and dividends.
Over the last five years, Mercury General has averaged an ROE of 7%, uninspiring for a company operating in a sector where the average shakes out around 12.5%.
Final Judgment
Mercury General isn’t a terrible business, but it doesn’t pass our quality test. Following the recent surge, the stock trades at 2.1× forward P/B (or $77.87 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of Mercury General
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