Today’s news: Mercury General Group (MCY) reports a big earnings miss; increases dividend; moves from Strong Buy to Buy.
Mercury General Group (MCY – yield 5.3%) reported third-quarter operating EPS of $0.78 yesterday vs. the consensus $1.04, which disappointed investors. The stock fell 11%.
The combined ratio rose 300 basis points to 98.6%. (A higher number is negative; a lower number is preferable.) The combined ratio represents the expense ratio plus the loss ratio. Increased claims and litigation expenses in Mercury General’s California commercial auto business and in their non-California private passenger auto business accounted for the higher combined ratio, and thus the earnings disappointment. The company might file for a rate increase in California by year end, and is also expecting near-term rate increases in several states, including Florida.
Revenue of $987.3 million beat the consensus estimate of $955.3 million, and $894.8 million a year ago, representing a 10.3% year-over-year total revenue increase and a 6.6% increase in net premiums earned. The company also declared a modest quarterly dividend increase to $0.63 per share. The current yield, based on a 47.45 share price, is 5.3%.
Mercury General Group is an automobile and multi-line insurer that operates in 11 U.S. states. The company was featured in the October issue of Cabot Undervalued Stocks Advisor.
I have an update in consensus earnings estimates, but keep in mind that it’s only been one day since quarterly results were reported, so we could still see some revisions to full-year estimates. At this point, analysts are expecting EPS to grow 68% in 2019 and 17.8% in 2020. The 2020 P/E is 13.3. So despite the less-than-favorable quarterly results, the full-year outlook continues to be attractive, and the dividend yield is huge.
I’m going to drop my recommendation down from Strong Buy to Buy, and I’m mostly speaking to dividend investors who might like to lock in the 5.3% current yield. Everybody else can wait for the share price to settle down. MCY is not going to rebound in a few days; it will take quite a few weeks before it turns upward again. Buy.