The Admiral share price is unmoved after 23% earnings growth. Time to buy?

Falling inflation has been boosting Admiral’s profits, but the share price is unmoved. Stephen Wright looks at a potential buying opportunity.

| More on:

Image source: Admiral Group plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Despite the company announcing strong earnings in 2023, the Admiral (LSE:ADM) share price is largely unmoved. But with a price-to-earnings (P/E) ratio of 24, is the stock still expensive?

In my view, Admiral is one of the best UK insurance stocks on the market. For investors with a long-term approach, I think it’s worth considering at today’s prices.

Earnings

Admiral’s earnings report from 2023 is full of impressive numbers. Turnover was up 31%, operating income increased by 23% and earnings per share grew 16%.

None of these, though, is the main number that stood out to me from the report. In my view, the biggest highlight was the company’s combined ratio falling from 96.8% to 88.7%. 

In this context, a lower number is a good thing. The combined ratio measures how much of an insurer’s premiums it pays away in costs and claims.

A declining combined ratio, therefore, means Admiral’s underwriting is becoming more profitable. And this is clearly a good thing for investors.

Improved trading conditions

Admiral also benefitted from an improving macroeconomic environment, especially late in the year. Specifically, lower inflation provided a boost to the company’s margins.

Lower residual car values helped decrease the rate at which replacement costs rise. And if the Bank of England sticks to its plan to bring down inflation, I think the outlook for 2024 is also positive.

One of the advantages of the car insurance industry over the life insurance industry is that policies typically only last a year or so. This allows insurers to adapt quickly to changes in conditions. 

Admiral managed to outperform its peers in this area, too. During 2023, it managed to increase its prices by more than its rivals, while adding more customers.

A stock to consider buying?

One of the risks with Admiral is that it operates in an industry where switching costs are low. When the time comes to renew, customers have little incentive to stick with their current provider. 

The danger is that this can lead to irrational competition. Even if rivals make a mistake and price policies too low, this could still lead to the company’s customer numbers falling.

One reason I prefer Admiral to other UK insurers, though, is that its telematics initiatives help it price policies more accurately. And the company has a big lead in this area.

That’s why I think Admiral shares are worth considering for investors. The company has come through a difficult trading period and I think it can do well going forward.

The investment case

Put simply, the investment case for Admiral consists of two points. The first is that it provides a product people need and the second is that it does it more efficiently than its rivals, in my opinion.

Together, I think that adds up to a powerful case. Profits might fluctuate from year to year, but I’m looking at this as a stock to own in my portfolio for the long term and the shares are firmly on my watchlist.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Caucasian woman holding up four fingers
Investing Articles

7%+ dividend yields! 4 FTSE 100 shares for investors to consider buying in April

These FTSE shares offer dividend yields comfortably above the index average of 3.7%. Here's why they could be good passive…

Read more »

Dividend Shares

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an…

Read more »

Investing Articles

The Aviva dividend yield’s already over 7%. Could it go higher?

Christopher Ruane explains why he thinks the Aviva dividend could be on course to grow this year and beyond. Might…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

2 shares I’d buy to try and double my money in 10 years

Stephen Wright thinks there are still opportunities to to buy UK shares that can double in value over the next…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

NIO stock has crashed! Here’s why I still wouldn’t touch it with a bargepole

I've been watching NIO stock falling heavily, and wondering when might be a good time to get in cheaply. Here's…

Read more »

Investing Articles

Why have Rolls-Royce shares fallen this week?

Rolls-Royce shares remain the best performing on the FTSE 100 over the past year, but there's been some pullback. Dr…

Read more »

Investing Articles

With a 4.3% yield, I consider this FTSE company an exceptional investment

Oliver Rodzianko say this FTSE company is focused on quality and long-term survival. As such, he thinks he'll hold it…

Read more »

Investing Articles

How I’d invest £10,000 in a Stocks & Shares ISA and aim for a £45,500 second income

Millions of us aren’t earning the second income we deserve. Here, Dr James Fox explains how he’d get his savings…

Read more »