Intrinsic value of Mercury General - MCY

Previous Close

$45.70

  Intrinsic Value

$39.13

stock screener

  Rating & Target

hold

-14%

Previous close

$45.70

 
Intrinsic value

$39.13

 
Up/down potential

-14%

 
Rating

hold

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

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

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

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
  6.20
  6.08
  5.97
  5.87
  5.79
  5.71
  5.64
  5.57
  5.52
  5.46
  5.42
  5.38
  5.34
  5.31
  5.27
  5.25
  5.22
  5.20
  5.18
  5.16
  5.15
  5.13
  5.12
  5.11
  5.10
  5.09
  5.08
  5.07
  5.06
  5.06
Revenue, $m
  0
  3,428
  3,637
  3,854
  4,080
  4,316
  4,563
  4,820
  5,089
  5,369
  5,663
  5,970
  6,290
  6,626
  6,978
  7,346
  7,731
  8,135
  8,558
  9,001
  9,466
  9,953
  10,464
  11,000
  11,561
  12,150
  12,768
  13,417
  14,097
  14,811
  15,559
Variable operating expenses, $m
 
  3,346
  3,549
  3,760
  3,981
  4,211
  4,451
  4,702
  4,964
  5,238
  5,524
  5,818
  6,131
  6,458
  6,801
  7,160
  7,535
  7,929
  8,341
  8,773
  9,226
  9,701
  10,199
  10,721
  11,268
  11,843
  12,445
  13,077
  13,740
  14,435
  15,165
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
  3,346
  3,549
  3,760
  3,981
  4,211
  4,451
  4,702
  4,964
  5,238
  5,524
  5,818
  6,131
  6,458
  6,801
  7,160
  7,535
  7,929
  8,341
  8,773
  9,226
  9,701
  10,199
  10,721
  11,268
  11,843
  12,445
  13,077
  13,740
  14,435
  15,165
Operating income, $m
  75
  83
  88
  93
  99
  105
  111
  118
  125
  132
  139
  151
  159
  168
  177
  186
  196
  206
  217
  228
  240
  252
  265
  279
  293
  308
  323
  340
  357
  375
  394
EBITDA, $m
  101
  109
  116
  123
  130
  137
  145
  153
  162
  171
  180
  190
  200
  211
  222
  234
  246
  259
  272
  286
  301
  317
  333
  350
  368
  386
  406
  427
  448
  471
  495
Interest expense (income), $m
  4
  11
  18
  25
  32
  39
  47
  55
  64
  72
  82
  91
  101
  112
  123
  135
  147
  159
  173
  187
  201
  217
  233
  249
  267
  286
  305
  325
  347
  369
  393
Earnings before tax, $m
  71
  71
  70
  69
  67
  66
  64
  63
  61
  59
  57
  60
  58
  56
  54
  51
  49
  47
  44
  41
  39
  36
  32
  29
  26
  22
  19
  15
  10
  6
  2
Tax expense, $m
  -2
  19
  19
  19
  18
  18
  17
  17
  16
  16
  16
  16
  16
  15
  14
  14
  13
  13
  12
  11
  10
  10
  9
  8
  7
  6
  5
  4
  3
  2
  0
Net income, $m
  73
  52
  51
  50
  49
  48
  47
  46
  45
  43
  42
  44
  42
  41
  39
  38
  36
  34
  32
  30
  28
  26
  24
  21
  19
  16
  14
  11
  8
  5
  1

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
  5,086
  5,395
  5,718
  6,054
  6,404
  6,770
  7,151
  7,550
  7,966
  8,402
  8,857
  9,333
  9,831
  10,353
  10,899
  11,471
  12,070
  12,698
  13,355
  14,045
  14,767
  15,525
  16,320
  17,153
  18,027
  18,944
  19,906
  20,915
  21,974
  23,085
Adjusted assets (=assets-cash), $m
  4,789
  5,086
  5,395
  5,718
  6,054
  6,404
  6,770
  7,151
  7,550
  7,966
  8,402
  8,857
  9,333
  9,831
  10,353
  10,899
  11,471
  12,070
  12,698
  13,355
  14,045
  14,767
  15,525
  16,320
  17,153
  18,027
  18,944
  19,906
  20,915
  21,974
  23,085
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
  195
  207
  220
  233
  246
  260
  275
  290
  306
  323
  340
  359
  378
  398
  419
  441
  464
  488
  513
  540
  567
  596
  627
  659
  693
  728
  765
  804
  844
  887
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
  508
  704
  908
  1,121
  1,343
  1,575
  1,817
  2,070
  2,334
  2,610
  2,898
  3,200
  3,516
  3,847
  4,193
  4,556
  4,935
  5,333
  5,750
  6,187
  6,646
  7,126
  7,630
  8,158
  8,712
  9,294
  9,903
  10,543
  11,215
  11,919
Total liabilities, $m
  3,036
  3,225
  3,421
  3,625
  3,838
  4,060
  4,292
  4,534
  4,787
  5,051
  5,327
  5,615
  5,917
  6,233
  6,564
  6,910
  7,273
  7,652
  8,050
  8,467
  8,904
  9,363
  9,843
  10,347
  10,875
  11,429
  12,011
  12,620
  13,260
  13,932
  14,636
Total equity, $m
  1,752
  1,862
  1,975
  2,093
  2,216
  2,344
  2,478
  2,617
  2,763
  2,916
  3,075
  3,242
  3,416
  3,598
  3,789
  3,989
  4,198
  4,418
  4,647
  4,888
  5,140
  5,405
  5,682
  5,973
  6,278
  6,598
  6,934
  7,286
  7,655
  8,043
  8,449
Total liabilities and equity, $m
  4,788
  5,087
  5,396
  5,718
  6,054
  6,404
  6,770
  7,151
  7,550
  7,967
  8,402
  8,857
  9,333
  9,831
  10,353
  10,899
  11,471
  12,070
  12,697
  13,355
  14,044
  14,768
  15,525
  16,320
  17,153
  18,027
  18,945
  19,906
  20,915
  21,975
  23,085
Debt-to-equity ratio
  0.183
  0.270
  0.360
  0.430
  0.510
  0.570
  0.640
  0.690
  0.750
  0.800
  0.850
  0.890
  0.940
  0.980
  1.020
  1.050
  1.090
  1.120
  1.150
  1.180
  1.200
  1.230
  1.250
  1.280
  1.300
  1.320
  1.340
  1.360
  1.380
  1.390
  1.410
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
  52
  51
  50
  49
  48
  47
  46
  45
  43
  42
  44
  42
  41
  39
  38
  36
  34
  32
  30
  28
  26
  24
  21
  19
  16
  14
  11
  8
  5
  1
Depreciation, amort., depletion, $m
  26
  27
  28
  29
  31
  32
  34
  36
  37
  39
  41
  39
  41
  43
  45
  48
  50
  53
  55
  58
  61
  64
  68
  71
  75
  79
  83
  87
  91
  96
  101
Funds from operations, $m
  304
  79
  79
  79
  80
  80
  81
  81
  82
  82
  83
  82
  83
  84
  84
  85
  86
  87
  88
  88
  89
  90
  91
  93
  94
  95
  96
  98
  99
  100
  102
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
  79
  79
  79
  80
  80
  81
  81
  82
  82
  83
  82
  83
  84
  84
  85
  86
  87
  88
  88
  89
  90
  91
  93
  94
  95
  96
  98
  99
  100
  102
Maintenance CAPEX, $m
  0
  -21
  -22
  -24
  -25
  -26
  -28
  -30
  -31
  -33
  -35
  -37
  -39
  -41
  -43
  -45
  -48
  -50
  -53
  -55
  -58
  -61
  -64
  -68
  -71
  -75
  -79
  -83
  -87
  -91
  -96
New CAPEX, $m
  -17
  -10
  -12
  -12
  -13
  -13
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -28
  -29
  -31
  -32
  -34
  -35
  -37
  -39
  -41
  -43
Cash from investing activities, $m
  -227
  -31
  -34
  -36
  -38
  -39
  -42
  -45
  -46
  -49
  -52
  -54
  -57
  -60
  -63
  -66
  -70
  -73
  -77
  -80
  -84
  -89
  -93
  -99
  -103
  -109
  -114
  -120
  -126
  -132
  -139
Free cash flow, $m
  60
  48
  45
  43
  42
  40
  39
  37
  35
  33
  31
  28
  26
  24
  21
  19
  16
  14
  11
  8
  5
  1
  -2
  -6
  -10
  -14
  -18
  -22
  -27
  -32
  -37
Issuance/(repayment) of debt, $m
  30
  188
  196
  204
  213
  222
  232
  242
  253
  264
  276
  289
  302
  316
  331
  346
  363
  380
  398
  417
  437
  458
  480
  504
  528
  554
  581
  610
  640
  671
  704
Issuance/(repurchase) of shares, $m
  2
  57
  62
  68
  74
  80
  87
  94
  101
  109
  117
  123
  132
  142
  152
  162
  173
  185
  198
  211
  224
  239
  254
  269
  286
  304
  322
  341
  362
  383
  405
Cash from financing (excl. dividends), $m  
  32
  245
  258
  272
  287
  302
  319
  336
  354
  373
  393
  412
  434
  458
  483
  508
  536
  565
  596
  628
  661
  697
  734
  773
  814
  858
  903
  951
  1,002
  1,054
  1,109
Total cash flow (excl. dividends), $m
  93
  293
  303
  316
  329
  343
  357
  373
  389
  407
  425
  440
  460
  481
  504
  527
  552
  579
  606
  635
  666
  698
  732
  768
  805
  844
  886
  929
  975
  1,023
  1,073
Retained Cash Flow (-), $m
  69
  -110
  -113
  -118
  -123
  -128
  -134
  -140
  -146
  -152
  -159
  -167
  -174
  -182
  -191
  -200
  -209
  -219
  -230
  -241
  -252
  -265
  -277
  -291
  -305
  -320
  -336
  -352
  -369
  -388
  -407
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
 
  183
  190
  198
  206
  214
  224
  233
  243
  254
  265
  273
  286
  299
  313
  328
  343
  359
  377
  395
  414
  434
  455
  477
  500
  524
  550
  577
  605
  635
  667
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
 
  176
  174
  172
  169
  166
  162
  158
  152
  146
  139
  130
  122
  114
  105
  96
  87
  78
  69
  61
  53
  45
  38
  31
  25
  20
  16
  12
  9
  7
  5
Current shareholders' claim on cash, %
  100
  97.8
  95.6
  93.3
  91.1
  88.9
  86.6
  84.4
  82.2
  80.0
  77.8
  75.7
  73.6
  71.6
  69.6
  67.5
  65.6
  63.6
  61.7
  59.8
  58.0
  56.2
  54.4
  52.7
  51.0
  49.3
  47.7
  46.1
  44.6
  43.1
  41.6

Mercury General Corporation is an insurance holding company. As of December 31, 2016, the Company and its subsidiaries were engaged in writing personal automobile insurance through 14 insurance subsidiaries in 11 states, principally California. Its segments include Property and Casualty Lines, and Other Lines. Its Property and Casualty segment offers various insurance products to its individual customers and small business customers. Its Other segment offers automobile mechanical breakdown warranties, which are sold through automobile dealerships and credit unions. It also writes homeowners, commercial automobile, commercial property, mechanical breakdown and umbrella insurance. Its insurance policies are sold through independent agents. As of December 31, 2016, it sold its policies through approximately 9,700 independent agents, its owned insurance agencies, Auto Insurance Specialists LLC and PoliSeek AIS Insurance Solutions, Inc., and directly through Internet sales portals.

FINANCIAL RATIOS  of  Mercury General (MCY)

Valuation Ratios
P/E Ratio 34.6
Price to Sales 0.8
Price to Book 1.4
Price to Tangible Book
Price to Cash Flow 8.8
Price to Free Cash Flow 9.4
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 6.2% 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 55.202 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 $2.5 billion.

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COMPANY NEWS

▶ Best NYSE Dividend Payers   [Feb-07-18 08:02AM  Simply Wall St.]
▶ Mercury General posts 4Q profit   [Feb-05-18 09:01AM  Associated Press]
▶ Slow Growth Mercury General Still Not a Buy   [Dec-21-17 03:29PM  GuruFocus.com]
▶ These 3 Stocks Just Raised Their Dividends   [Nov-12-17 11:47AM  Motley Fool]
▶ Mercury General posts 3Q profit   [Oct-30-17 08:39AM  Associated Press]
▶ Top Ranked Income Stocks to Buy for August 22nd   [Aug-22-17 09:45AM  Zacks]
▶ XL Group (XL) & Subsidiaries Rated by A.M. Best   [Aug-14-17 05:24PM  Zacks]
▶ Mercury General posts 2Q profit   [Jul-31-17 11:02PM  Associated Press]
▶ The Top Dividend-Growing Financial Sector Stocks   [Jul-12-17 02:44PM  Market Realist]
▶ Are You Ready for Hurricane Season?   [Jun-01-17 08:00AM  PR Newswire]
Financial statements of MCY
Valuation of Stocks

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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