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Chuck Carnevale
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Charles (Chuck) C. Carnevale is the creator of F.A.S.T. Graphs™. Chuck is also co-founder of an investment management firm. He has been working in the securities industry since 1970: he has been a partner with a private NYSE member firm, the President of a NASD firm, Vice President and Regional... More
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  • Reader Request: FAST Graphs™ Stock Research Analysis On Mercury General Corp And Banco Santander SA  0 comments
    Aug 3, 2012 3:08 PM | about stocks: SAN

    I have had requests to analyze the following companies: Mercury General Corp (NYSE:MCY) and Banco Santander SA (NYSE:SAN). Unfortunately, I do not follow either one of these companies; therefore, this review is based solely on what I see by utilizing the FAST Graphs Fundamental Analyzer Software Tool. Therefore, additional research should be conducted before any decisions are made.

    Mercury General Corp (MCY)

    One of the great advantages of the FAST Graphs™ software tool is its ability to provide an instantaneous view of a company's historical operating history (business results), and simultaneously how the market has traditionally valued those business results. Therefore, a quick glance at the Earnings and Price Correlated FAST Graphs™ on Mercury General shows a company with a very inconsistent and highly cyclical historical earnings record. Moreover, we also see that the stock price has generally gone where earnings have gone.

    Even thought the blended PE ratio looks low at 13.8, the fact that earnings have fallen for two consecutive years and are estimated to fall again this fiscal year, cause me concerns. Based on the historical record of this company, I would consider it a trading stock only. In other words, it doesn't make sense as a long-term buy-and-hold candidate, which I personally look for.

    (click to enlarge)

    Although the company has produced a excellent record of dividend growth, I do not feel that the dividends justify the capital risk. A $1000 investment in this stock on 12/31/1997 would have fallen to $650.52. Therefore, even when dividends are added in, the company has been dead money for the last 15 years.

    (click to enlarge)

    Consensus estimates for earnings are expected to drop this fiscal year, and then rise rather strongly next fiscal year before leveling out to a long-term 8% growth rate. Consequently, I would highly question the reliability of any of those forecasts based both on historical results and a forecast for erratic future results. The bottom line is that I find everything about this company too inconsistent to rely on, and therefore, ascertaining True Worth evaluation extremely difficult.

    (click to enlarge)

    Banco Santander SA (SAN)

    The Earnings and Price Correlated historical FAST Graphs™ on Banco Santander SA provide a validation of the principle that price follows earnings over the long run. Up to and through calendar year 2008 (the great recession), Banco Santander SA produced strong earnings growth and price generally followed. However, notice that when the stock was overvalued in 1998, that the price drifted lower for over four years before finally becoming into fair value.

    The most alarming aspect of the Earnings and Price Correlated graph on this company is the consistently falling earnings since 2008 that generates significant red flags. Furthermore, the earnings and price relationship is extremely valid over the last six years (see second graph below). In other words, since 2007 price has followed earnings down in a highly correlated fashion.

    (click to enlarge)

    (click to enlarge)

    When you look at the long-term performance of this company as it relates to the above 15-year historical graph, we see that long-term shareholders suffered capital losses, even though the generous dividend allowed them to eke out a modestly positive return.

    Additionally, note that there were two dividend cuts, one in 2009 and one in 2010 that add to the uncertainty in investing in the ADR.

    (click to enlarge)

    Currently Standard & Poor's Capital IQ provides no estimates for Banco Santander SA earnings. Therefore, FAST Graphs™ automatically calculates the most recent historical results that are positive. In this case, that required a 7-year average growth rate that was only 1.6% per annum.

    (click to enlarge)

    To be fair, a cross-check of three analysts reporting to Zacks show estimated earnings of $0.72 for fiscal 2012, and $0.82 for fiscal 2013. However, these analysts do forecast a long-term growth rate beyond 2013 of 12.4%. If these analysts were correct, then this company would be an attractive investment at today's levels. However, I refer you back to the long string of falling earnings since the great recession.

    (click to enlarge)

    Summary and Conclusions

    This analysis was offered to accommodate the requests of readers interested in both of these companies. Based solely on the essential "fundamentals at a glance" provided by FAST Graphs, I believe the risks of investing in either of these companies are higher than the potential return. Furthermore, there are numerous companies with good fundamental histories and future prospects that match these companies in both current yield and long-term opportunity. Those are where I would look for future investment.

    I want to once again reiterate that this analysis is based solely on what I saw with FAST Graphs™. In my opinion, FAST Graphs™ allow me to research stocks deeper and faster. In this vein, the tool also allows me to quickly determine whether or not I feel a comprehensive research effort is worthwhile. In both of these cases, I would pass and continue searching for better prospects with better records of earnings and dividend growth.

    Disclosure: No positions at the time of writing.

    Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: SAN
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