Can Admiral Group's growth continue and are the shares cheap?
Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If bought when the shares are cheap, two drivers could move the share price up:
- growth in earnings, and
- an upwards P/E re-rating.
Highly successful fund manager Peter Lynch classified steady growers as Stalwarts, which he typically traded for 20% to 50% share-price gains. But whether buying for gains like that or holding for the longer term, we need to know if reliable earnings growth can continue, and whether the shares are cheap.
Seeking durable growth
Not all companies achieve stable growth as you can see by the aggregate performance of those in London's premier FTSE 100 index (UKX), where the compound annual earnings-growth rate has been just 0.7% over the last five years:
|Year to June||2007||2008||2009||2010||2011||2012|
|FTSE 100 index||6608||5626||4249||4917||5946||5571|
|Aggregate earnings per share||537||503||427||397||527||557|
Consistent, cash flow-backed growth in profits is a promising characteristic in today's markets so, for this series, I'm examining firms with annual earnings growth between 4% and 20%.
One contender is Admiral Group (LSE: ADM), which is a vehicle insurance provider. This table summarises the company's recent financial record:
|Year to June||2007||2008||2009||2010||2011|
|Earnings per share||48.6p||54.9p||59p||72.3p||81.9p|
Earnings have grown at an equivalent 13.9% compound annual growth rate putting Admiral in the Stalwart category.
Since it launched in 1993, Admiral has grown from a small start up to one of the largest car insurance providers in the UK, and with a presence in seven countries. Based in South Wales, the firm started with 57 employees and now employs around 6,000 people worldwide.
Brisk growth means the company insures over 3.4 million vehicles. In 2011, revenue rose 38% to £2.19 billion (2010: £1.58 billion), which includes some from its popular price comparison business, Confused.com.
But by far the biggest source of revenue is UK car insurance at 90% of the total, followed by international car insurance at 6%, and comparison and other businesses at just 4%.
The firm uses reinsurance partners to mitigate underwriting risk and returns much of its annual profits to shareholders in the form of special dividends.
The flamboyantly named CEO, Henry Engelhardt CBE, uses amusingly flowery language in the company's financial reports, recently quoting from Dickens's A Tale of Two Cities to describe the firm's performance, beginning, "It was the best of times, it was the worst of times..."
Admiral's earnings growth and value score
I analyse five indicators to determine whether earnings growth can continue and if the shares offer good value:
1. Growth: net cash from operations is lagging the growth in revenue and earnings. 3/5
2. Level of debt: net cash on the most recent balance sheet. 5/5
3. Outlook and current trading: recent trading supports a robustly positive outlook. 5/5
4. Enterprise value to free cash flow: at 17, is above historical earnings growth rate. 2/5
5. Price to earnings: around 14 and just above historical earnings growth rate. 2/5
Overall, I score Admiral 17 out of 25, which encourages me to believe this stalwart may continue earnings growth that out-paces that of the wider FTSE 100. However, the shares look fully priced when compared to the FTSE's price to earnings ratio of around 10 and the firm's growth predictions.
The company's strong cash flow, zero borrowings, and positive outlook are attractive. However, as an insurer, the business is exposed to claim, cyclical and other risks that have potential to affect future growth in my opinion. I'd expect such risks to weigh permanently on the valuation of Admiral's shares.
Right now, forecast earning growth is around 11% for 2013, and the forward P/E ratio is about 12 with the shares at 1181p. Considering that and the other factors analysed in this article, I think the shares look fairly priced and the company is a good candidate for my watch list.
Admiral is one of several steady-earnings-growing stalwarts on the London stock exchange, each with the potential to deliver significant capital appreciation when purchased at sensible prices.
If you, like me, are serious about capital gains, I recommend you now read "Top Sectors For 2012", in which three Motley Fool Share Advisor analysts each study a favourable industry -- and pinpoint a particular share to consider for this year and beyond.
The report covers various opportunities. One could provide 'solid returns and nice dividends', another offers 'global diversification and long-term growth potential', while a third looks at a 'high-quality business' from a battered sector.
You can read -"Top Sectors For 2012"- today by requesting the report free. But hurry, the report is available for a limited time only.
If you are an ambitious investor hoping to profit from this uncertain economy, as I am, I urge you to read "10 Steps To Making A Million In The Market" today -- it could transform your wealth. Click here now to request your free, no-obligation copy. The Motley Fool is helping Britain invest. Better.
Further investment opportunities:
> Kevin does not own any shares mentioned in this article.