Intrinsic value of Mercury General - MCY

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$59.94

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$59.94

 
Intrinsic value

$19.47

 
Up/down potential

-68%

 
Rating

str. sell

 
Value-price divergence* premium content

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Our model is not good at valuating stocks of financial companies, such as MCY.

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of MCY stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 3.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  7.28
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  0
  3,293
  3,368
  3,455
  3,552
  3,660
  3,778
  3,907
  4,046
  4,196
  4,357
  4,529
  4,713
  4,909
  5,117
  5,337
  5,571
  5,819
  6,081
  6,357
  6,650
  6,958
  7,283
  7,625
  7,986
  8,367
  8,767
  9,188
  9,632
  10,098
  10,589
Variable operating expenses, $m
 
  3,213
  3,287
  3,372
  3,466
  3,571
  3,686
  3,812
  3,948
  4,094
  4,251
  4,414
  4,594
  4,784
  4,987
  5,202
  5,430
  5,672
  5,927
  6,196
  6,481
  6,781
  7,098
  7,432
  7,784
  8,155
  8,545
  8,956
  9,388
  9,842
  10,321
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  3,153
  3,213
  3,287
  3,372
  3,466
  3,571
  3,686
  3,812
  3,948
  4,094
  4,251
  4,414
  4,594
  4,784
  4,987
  5,202
  5,430
  5,672
  5,927
  6,196
  6,481
  6,781
  7,098
  7,432
  7,784
  8,155
  8,545
  8,956
  9,388
  9,842
  10,321
Operating income, $m
  75
  79
  81
  83
  86
  88
  91
  95
  98
  102
  106
  115
  119
  124
  130
  135
  141
  147
  154
  161
  168
  176
  184
  193
  202
  212
  222
  233
  244
  256
  268
EBITDA, $m
  101
  105
  107
  110
  113
  116
  120
  124
  129
  133
  139
  144
  150
  156
  163
  170
  177
  185
  193
  202
  212
  221
  232
  243
  254
  266
  279
  292
  306
  321
  337
Interest expense (income), $m
  4
  11
  13
  16
  19
  22
  25
  29
  34
  38
  43
  48
  54
  60
  67
  73
  81
  88
  96
  105
  114
  124
  134
  145
  156
  168
  180
  194
  207
  222
  237
Earnings before tax, $m
  71
  68
  68
  67
  67
  67
  66
  65
  65
  64
  63
  66
  65
  64
  63
  62
  61
  59
  58
  56
  54
  52
  51
  48
  46
  44
  42
  39
  37
  34
  31
Tax expense, $m
  -2
  18
  18
  18
  18
  18
  18
  18
  17
  17
  17
  18
  18
  17
  17
  17
  16
  16
  16
  15
  15
  14
  14
  13
  13
  12
  11
  11
  10
  9
  8
Net income, $m
  73
  50
  49
  49
  49
  49
  48
  48
  47
  47
  46
  48
  48
  47
  46
  45
  44
  43
  42
  41
  40
  38
  37
  35
  34
  32
  30
  29
  27
  25
  23

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  4,789
  4,885
  4,997
  5,126
  5,270
  5,430
  5,605
  5,796
  6,003
  6,225
  6,464
  6,720
  6,993
  7,283
  7,592
  7,919
  8,266
  8,633
  9,022
  9,432
  9,866
  10,323
  10,805
  11,314
  11,849
  12,413
  13,007
  13,632
  14,290
  14,982
  15,710
Adjusted assets (=assets-cash), $m
  4,789
  4,885
  4,997
  5,126
  5,270
  5,430
  5,605
  5,796
  6,003
  6,225
  6,464
  6,720
  6,993
  7,283
  7,592
  7,919
  8,266
  8,633
  9,022
  9,432
  9,866
  10,323
  10,805
  11,314
  11,849
  12,413
  13,007
  13,632
  14,290
  14,982
  15,710
Revenue / Adjusted assets
  0.000
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
  0.674
Average production assets, $m
  186
  188
  192
  197
  202
  209
  215
  223
  231
  239
  248
  258
  269
  280
  292
  304
  318
  332
  347
  362
  379
  397
  415
  435
  455
  477
  500
  524
  549
  576
  604
Working capital, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total debt, $m
  320
  380
  451
  533
  624
  726
  837
  958
  1,089
  1,230
  1,381
  1,543
  1,716
  1,900
  2,096
  2,304
  2,524
  2,757
  3,003
  3,263
  3,538
  3,828
  4,134
  4,456
  4,795
  5,153
  5,530
  5,926
  6,343
  6,782
  7,243
Total liabilities, $m
  3,036
  3,097
  3,168
  3,250
  3,341
  3,443
  3,554
  3,675
  3,806
  3,947
  4,098
  4,260
  4,433
  4,617
  4,813
  5,021
  5,241
  5,474
  5,720
  5,980
  6,255
  6,545
  6,851
  7,173
  7,512
  7,870
  8,247
  8,643
  9,060
  9,499
  9,960
Total equity, $m
  1,752
  1,788
  1,829
  1,876
  1,929
  1,987
  2,051
  2,121
  2,197
  2,278
  2,366
  2,459
  2,559
  2,666
  2,779
  2,898
  3,025
  3,160
  3,302
  3,452
  3,611
  3,778
  3,955
  4,141
  4,337
  4,543
  4,761
  4,989
  5,230
  5,484
  5,750
Total liabilities and equity, $m
  4,788
  4,885
  4,997
  5,126
  5,270
  5,430
  5,605
  5,796
  6,003
  6,225
  6,464
  6,719
  6,992
  7,283
  7,592
  7,919
  8,266
  8,634
  9,022
  9,432
  9,866
  10,323
  10,806
  11,314
  11,849
  12,413
  13,008
  13,632
  14,290
  14,983
  15,710
Debt-to-equity ratio
  0.183
  0.210
  0.250
  0.280
  0.320
  0.370
  0.410
  0.450
  0.500
  0.540
  0.580
  0.630
  0.670
  0.710
  0.750
  0.790
  0.830
  0.870
  0.910
  0.950
  0.980
  1.010
  1.050
  1.080
  1.110
  1.130
  1.160
  1.190
  1.210
  1.240
  1.260
Adjusted equity ratio
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  73
  50
  49
  49
  49
  49
  48
  48
  47
  47
  46
  48
  48
  47
  46
  45
  44
  43
  42
  41
  40
  38
  37
  35
  34
  32
  30
  29
  27
  25
  23
Depreciation, amort., depletion, $m
  26
  26
  26
  27
  27
  28
  29
  30
  31
  31
  33
  29
  31
  32
  33
  35
  36
  38
  39
  41
  43
  45
  47
  49
  52
  54
  57
  60
  62
  65
  69
Funds from operations, $m
  304
  75
  76
  76
  76
  77
  77
  77
  78
  78
  79
  78
  78
  79
  79
  80
  80
  81
  81
  82
  83
  83
  84
  85
  86
  86
  87
  88
  89
  90
  91
Change in working capital, $m
  17
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from operations, $m
  287
  72
  76
  76
  76
  77
  77
  77
  78
  78
  79
  78
  78
  79
  79
  80
  80
  81
  81
  82
  83
  83
  84
  85
  86
  86
  87
  88
  89
  90
  91
Maintenance CAPEX, $m
  0
  -21
  -21
  -22
  -22
  -23
  -24
  -24
  -25
  -26
  -27
  -28
  -29
  -31
  -32
  -33
  -35
  -36
  -38
  -39
  -41
  -43
  -45
  -47
  -49
  -52
  -54
  -57
  -60
  -62
  -65
New CAPEX, $m
  -17
  -2
  -4
  -5
  -6
  -6
  -7
  -7
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -27
  -28
Cash from investing activities, $m
  -227
  -23
  -25
  -27
  -28
  -29
  -31
  -31
  -33
  -35
  -36
  -38
  -39
  -42
  -44
  -46
  -48
  -50
  -53
  -55
  -58
  -61
  -64
  -67
  -70
  -74
  -77
  -81
  -85
  -89
  -93
Free cash flow, $m
  60
  48
  50
  49
  48
  47
  47
  46
  44
  43
  42
  40
  38
  37
  36
  34
  32
  31
  29
  27
  25
  23
  20
  18
  16
  13
  10
  7
  4
  1
  -2
Issuance/(repayment) of debt, $m
  30
  60
  71
  81
  91
  101
  111
  121
  131
  141
  151
  162
  173
  184
  196
  208
  220
  233
  246
  260
  275
  290
  306
  322
  340
  358
  377
  396
  417
  439
  462
Issuance/(repurchase) of shares, $m
  2
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  32
  60
  71
  81
  91
  101
  111
  121
  131
  141
  151
  162
  173
  184
  196
  208
  220
  233
  246
  260
  275
  290
  306
  322
  340
  358
  377
  396
  417
  439
  462
Total cash flow (excl. dividends), $m
  93
  109
  121
  131
  140
  149
  158
  167
  175
  184
  194
  202
  211
  221
  231
  242
  252
  264
  275
  287
  300
  313
  326
  340
  355
  371
  387
  404
  421
  440
  459
Retained Cash Flow (-), $m
  69
  -36
  -41
  -47
  -53
  -58
  -64
  -70
  -76
  -81
  -87
  -94
  -100
  -106
  -113
  -120
  -127
  -134
  -142
  -150
  -159
  -167
  -177
  -186
  -196
  -206
  -217
  -229
  -241
  -253
  -266
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  73
  80
  84
  87
  90
  93
  97
  100
  103
  106
  108
  112
  115
  118
  122
  125
  129
  133
  137
  141
  145
  150
  154
  159
  164
  169
  175
  181
  187
  193
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  70
  73
  73
  72
  70
  68
  65
  62
  59
  56
  51
  48
  44
  40
  36
  32
  28
  24
  21
  18
  15
  12
  10
  8
  6
  5
  4
  3
  2
  1
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Mercury General Corporation, together with its subsidiaries, engages in writing personal automobile insurance in the United States. The company also writes homeowners, commercial automobile, commercial property, mechanical breakdown, and umbrella insurance. Its automobile insurance products cover collision, property damage, bodily injury, comprehensive, personal injury protection, underinsured and uninsured motorist, and other hazards; and homeownerÂ’s insurance products covers dwelling, liability, personal property, fire, and other hazards. The company sells its policies through a network of independent agents, 100% owned insurance agents, and direct channels in Arizona, California, Florida, Georgia, Illinois, Nevada, New Jersey, New York, Oklahoma, Texas, and Virginia. Mercury General Corporation was founded in 1960 and is headquartered in Los Angeles, California.

FINANCIAL RATIOS  of  Mercury General (MCY)

Valuation Ratios
P/E Ratio 45.4
Price to Sales 1
Price to Book 1.9
Price to Tangible Book
Price to Cash Flow 11.5
Price to Free Cash Flow 12.3
Growth Rates
Sales Growth Rate 7.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -15%
Cap. Spend. - 3 Yr. Gr. Rate -2.2%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 18.3%
Total Debt to Equity 18.3%
Interest Coverage 19
Management Effectiveness
Return On Assets 1.6%
Ret/ On Assets - 3 Yr. Avg. 2.5%
Return On Total Capital 3.5%
Ret/ On T. Cap. - 3 Yr. Avg. 5.2%
Return On Equity 4.1%
Return On Equity - 3 Yr. Avg. 5.9%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 3.1%
EBITDA Margin - 3 Yr. Avg. 5.2%
Operating Margin 2.3%
Oper. Margin - 3 Yr. Avg. 4.3%
Pre-Tax Margin 2.2%
Pre-Tax Margin - 3 Yr. Avg. 4.3%
Net Profit Margin 2.3%
Net Profit Margin - 3 Yr. Avg. 3.5%
Effective Tax Rate -2.8%
Eff/ Tax Rate - 3 Yr. Avg. 7%
Payout Ratio 187.7%

MCY stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MCY stock intrinsic value calculation we used $3228 million for the last fiscal year's total revenue generated by Mercury General. The default revenue input number comes from 2016 income statement of Mercury General. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MCY stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for MCY is calculated based on our internal credit rating of Mercury General, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Mercury General.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MCY stock the variable cost ratio is equal to 97.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for MCY stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Mercury General.

Corporate tax rate of 27% is the nominal tax rate for Mercury General. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MCY stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MCY are equal to 5.7%.

Life of production assets of 8.8 years is the average useful life of capital assets used in Mercury General operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MCY is equal to 0%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1752 million for Mercury General - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 55.419 million for Mercury General is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Mercury General at the current share price and the inputted number of shares is $3.3 billion.


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COMPANY NEWS

▶ Hedge Funds Are Crazy About Mercury General Corporation (MCY)   [Dec-10-16 03:17PM  at Insider Monkey]
▶ The 5 Dividend Aristocrat Stocks With the Highest Yields   [Sep-09-16 09:00AM  at Kiplinger]
▶ 3 Dividend Growers With 4%+ Yields   [10:37AM  at Forbes]
▶ Go Green And Save 'Green' On Car Insurance   [Jun-20-16 12:00PM  PR Newswire]
Stock chart of MCY Financial statements of MCY
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The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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