Fool's Eye View

[ March 9, 2000 ]

Admiral Sinks

By Bruce Jackson (TMF Googly)

It feels to me like Admiral PLC (LSE: ADC) have been around forever. However, in corporate terms, they are still a baby, having been established in 1979. Still, for an IT services group, that is considered pretty old.

A couple of years ago, when Motley Fool UK was exclusively on AOL and very much in its infancy, Admiral was quite a popular company with Fools. They were then in the Support Services sector, and one of the relatively few companies which were operating in the mega-fast growing IT services sector. With earnings growth since 1993 of 25%, 25%, 41%, 63% and 36%, it was no wonder the company was popular. The share price naturally followed higher, going from a low point of 164p in 1996 to a peak of 2175p in February this year. Now that's what I call good going.

Personally I've always been impressed by the company's openness in its correspondence with shareholders. Chairman and co-founder Clay Brendish's statement in this mornings results statement is no exception. He describes 1999 as "a difficult but memorable year for Admiral. He concludes with "So far this year we have seen a gradual recovery in levels of market activity and we remain positive on the future outlook for the Company." I'm only guessing, but I reckon those two comments are largely responsible for Admiral's shares plunging 160p or 8% to 1820p in early morning trading.

Here's the headline numbers;

Sales             +16% to £170.2m
Operating Profit  + 5% to £ 23.5m
EPS               + 3% to   25.9p

Are these the sort of growth numbers shareholders and potential investors would wish to see from a company trading on a price-to-earnings ratio (P/E) of 70? I suspect not, but then again to me the share prices of many technology related companies have long been de-coupled from reality. To put that into perspective, a P/E of 70 translates into a earnings yield of just 1.4% (1 / 70), some way less than the risk-free interest rate of 6%. Put bluntly, there's a lot of good news already priced into Admiral's shares. Not even a tie up with wonder stock Baltimore Technologies (LSE: BLM) could save their bacon this morning.

But, you can't blame the company for its high share price -- that's the market's decision. Although it's nice to have a high and rising share price, Admiral will certainly be feeling the pressure to keep it that way. Any wrong turns or hiccups, and bombs away. They've actually 'got away' with a couple of profit warnings already in 1999. If a similar thing happened to a smaller engineering company, it would be trading on a P/E of less than 10 instead of watching their shares hit a new peak just a couple of weeks ago. What was that about the market being irrational?

Admiral is effectively a people mover. They employ their own staff, then contract them out to clients, naturally charging a nice big premium for the privilege. If you get things right -- meaning your staff utilisation levels are high -- this can be quite a lucrative business. But, as happened with Admiral in 1999, matching supply and demand is never an easy task -- for the first time in at least 5 years, operating margins fell.

With Y2K behind us, in theory Admiral's clients should be ready to resume their IT spending sprees, with 2000 and beyond being concentrated on e-everything. Given Admiral's IT expertise, they say they are "well placed to reap the rewards of this technological revolution." When saying this, they are rightly looking to the long-term. But saying there's only been a "gradual recovery in levels of market activity" so far this year gives the indication that Admiral's problems of 1999 are not yet firmly behind them. In Warren Buffett's language, buyers of Admiral today will be paying a high price for a cheery consensus.

Related Links
• Admiral web-page
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