In the second post of my new feature Serious Money: AIG, ALL, CB, HIG, MET, ORI - cheap insurance, after considerable review, The Allstate Corp. (NYSE: ALL): came out on top, looking like the bargain of the group. It appears such a bargain that I would think Berkshire Hathaway (NYSE: BRK.A) should be looking at parting with some of its cash to buy it. Allstate's closing stock price Wednesday was $59.86; the following were its stated metrics:
- Dividend Yield: 2.52%
- Price-to-sales ratio - P/S: 1.06
- Price-to-book ratio - P/B: 1.09
- Price-to-cash-flow - P/CF: 7.53
- Return-on-invested capital - ROIC: 20.1%
- Price-to-earnings ratio - P/E: 7.64
Everything about Allstate that I have been able to find indicates that this stock is screaming "Buy me, buy me" and could be acquired. It is capitalized at a little over $37 billion (large but still manageable) and has a long term debt-to-equity ratio of 0.2 compared to Berkshire's 0.3. Furthermore, Berkshire's ROIC is only 9.66 currently - half that of Allstate. Given that Allstate is a direct seller of insurance through its own network of agents, a model not unlike Berkshire's other insurance companies, it seems like Warren Buffett should be looking in this direction. This would reduce cash which is a drag on earnings and put it to good use with immediate benefits.
Mercury Insurance (NYSE: MCY) was not included in the Serious Money post linked above because it is more of a regional player in California and Florida, but based on value it could have been. I think this company, focused on car insurance, could be acquired in total, and should be folded into Geico Insurance, a wholly owned subsidiary of Berkshire Hathaway. The closing stock price Friday for Mercury was $53.04, and the following were it's stated metrics:
- Dividend Yield: 3.93%
- Price-to-sales ratio - P/S: 0.93
- Price-to-book ratio - P/B: 1.71
- Price-to-cash-flow - P/CF: 8.17
- Return-on-invested capital - ROIC: 12.21%
- Price-to-earnings ratio - P/E: 13.53
While Mercury cannot compare to Allstate in every area, feast your eyes on the generous yield and the P/S under 1.0. It is capitalized at only $2.9 billion and has a long-term debt-to-equity ratio of 0.1. Berkshire could acquire Mercury for the interest it is making on its $35 billion to $40 billion in cash it has been sitting on without touching principal. They would gain a lot of clients while saving a bundle skipping over the 4,500 sales reps now used by Mercury, implementing Geico's direct sales model. The stock has been trading between $50 and $60 for the last four years. For individual investors I would not be interested until it dropped a few bucks. Another point of interest is that Chairman George Joseph, who along with his wife founded Mercury Casualty in 1961, owns more than 50% of the company -- selling to Buffett might be a nice exit strategy.
In the past I have been comforted when I purchased PetroChina ADR (NYSE: PTR), Johnson & Johnson (NYSE: JNJ), ConocoPhillips (NYSE: COP) and United Parcel Service (NYSE: UPS) and then learned later through the required quarterly reporting of Berkshire Hathaway that it had also. Sort of like getting an atta-boy from the coach. I have studied value investing and I still have a lot to learn, but it would not surprise me to find Mr. Buffett has been looking in the same places I have - and probably sooner too.
Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm. Check out his other posts for BloggingStocks here.
Reader Comments (Page 1 of 1)
4-03-2007 @ 10:26AM
Michael Schneider said...
Has anyone ever been successful at predicting what Warren Buffett will buy? People try often but aside from some after-the fact "predictions" I haven't seen examples of people getting it right ahead of time. The exercise is probably more good than futile though in that it gives more focus to value stocks.
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