Honk If You Like Mercury GeneralBy
Ed Walczak, U.S. investment chief for German bank Vontobel, which steers $2 billion in the U.S., was one of those who cheered the market's plunge. The unexpectedly big fall gave him the opportunity to bargain-buy one of his chief favorites: Mercury General (MCY), a large auto insurer in California.
Why is he hot on Mercury? Walczak, a Warren Buffett disciple, thinks Mercury is another GEICO, a low-cost insurer that Buffett recently acquired. "Mercury General is a Buffett-type stock, with insiders owning a big stake in the company," notes Walczak.
The company, a low-cost auto insurer that sells through outside agents, has benefited from a new California law requiring motor vehicle insurance. Mercury has buyout appeal, says Walczak. "It won't be illogical if Commerce Group, a large auto insurer in Massachusetts, seeks to buy Mercury in order to expand in California," says Walczak. Two years ago, Commerce Group was rumored to be interested in Mercury. Other possible buyers: GEICO and American Insurance Group, says Walczak. In a buyout, he figures the stock is worth 73.
Shares of Mercury had been in a downdraft even before the Dow's big drop, sinking from 69 on July 13 to 43 in just a month. There was concern about earnings momentum over the next several quarters. Walczak thinks the selling was unjustified. When the Dow crashed on Aug. 31, it skidded some more, to 36. By Sept. 2, it had risen to 39 7/16 He expects earnings of $3.45 in 1998 and $3.60 in 1999.