MCY Lags Industry, Trades at a Discount: What Should Investors Do Now?

Shares of Mercury General Corporation MCY have lost 1.8% in the past year against the industry, the Finance sector and the Zacks S&P 500 composite’s growth of 27.7%, 14.3% and 6.7%, respectively. 

The insurer has a market capitalization of $2.90 billion. The average volume of shares traded in the last three months was 0.7 million.
MCY shares are trading below the 50-day moving average, indicating a bearish trend.

MCY vs. Industry, Sector, S&P in One Year

MCY Shares are Affordable

MCY shares are trading at a price -to-book value of 1.49X, lower than the industry average of 1.61X. Its pricing, at a discount to the industry average, gives a better entry point to investors. The insurer has an impressive Value Score of A. Shares of other insurers like Cincinnati Financial Corporation CINF, CNA Financial Corporation CNA and NMI Holdings Inc. NMIH are also trading at a discount to the industry average.

MCY’s Growth Projection Encourages

The Zacks Consensus Estimate for 2025 revenues is pegged at $5.92 million, implying a year-over-year improvement of 9.8%. The estimate for 2026 earnings per share and revenues indicates an increase of 1,150% and 7.1%, respectively, from the corresponding 2025 estimates. 

The insurer has a solid surprise history. It surpassed earnings estimates in each of the last four quarters, the average beat being 227.8%. MCY has an impressive Growth Score of A. This style score helps analyze the growth prospects of a company. 

MCY’s Favorable Return on Capital 

Return on equity (ROE) for the trailing 12 months was 22.54%, comparing favorably with the industry’s 8.34%. This reflects its efficiency in utilizing shareholders’ funds.  

Return on invested capital in the trailing 12 months was 13.37%, better than the industry average of 6.36%, reflecting MCY’s efficiency in utilizing funds to generate income. 

Key Drivers of MCY

Mercury General has been witnessing an improvement in net premiums written across its Property and Casualty segment. Rate increases in the California automobile and homeowners lines of insurance business and an increase in the number of policies written in the California private passenger automobile and homeowners lines of insurance business should drive net premiums earned. In fact, the top line witnessed a five-year (2020-2024) CAGR of 7.6%, driven by higher net premiums earned, net investment income and other revenues.

Net investment income has been an important component of Mercury General’s top-line growth. Mercury General’s net investment income witnessed a CAGR of 15.7% in the last five years (2020-2024). Net investment income stands to benefit from a higher average yield combined with higher average invested assets and cash. Increasing overall market interest rates, as well as higher yields on investments based on floating interest rates, are expected to drive the average annual yield on investments. The company expects 2025 investment income to be near 2024 levels.

Mercury General has generated positive cash flow from operations each year since the public offering of its common stock in November 1985. With combined cash and short-term investments, as well as undrawn credit in its unsecured credit facility, the company believes its cash flow from operations is adequate to satisfy its liquidity requirements without the forced sale of investments. Investment maturities are also available to meet the company’s liquidity needs. 

Mercury General’s debt levels have remained relatively stable in the past few years. The company’s debt-to-capital ratio as of Dec. 31, 2024, improved from the end of 2023. The company has more than $1 billion in cash and short-term investments on hand, which is sufficient for the company to meet its debt obligations. Also, the company’s times interest earned in the fourth quarter of 2024 was better when compared with the 2023-end figure, implying that its earnings are sufficient to cover interest obligations.

However, Mercury General has been witnessing rising expenses over the past few years, primarily due to higher losses and loss adjustment expenses, policy acquisition costs and other operating expenses. The company must grow its revenues at a higher magnitude than the rise in expenses, or else margins may erode.

Conclusion

Solid performance across its Property and Casualty segment, rate increases, rise in the number of policies written, higher average invested assets and cash, as well as financial flexibility, make Mercury General a strong contender for being in one’s portfolio. Favorable estimates, improved leverage and attractive valuation also add to the upside. MCY has a VGM Score???of A. VGM Score helps identify stocks with the most attractive value, best growth and the most promising momentum.

Given the escalating expenses, it is better to stay cautious about this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research