Today, I will be taking a look at how these four companies have managed to outperform the market.
Profitability in the UK motor insurance industry has been difficult for a number of years, as intense competition has placed downward pressure of premium rates and the cost of claims continues to rise. As many insurers complain that these trends have led to lower profitability, Admiral Group (LSE: ADM) continues to grow its profits and the number of policyholders.
Admiral has a robust track record of outperforming the sector in terms of profitability, and its lead over competitors has been widening recently. In the first half of 2015, its combined ratio improved to 82.7%, from 85.1% last year. This helped earnings per share rise 4.0% to 54.8 pence, and allowed Admiral to increase its dividend by 3.2% to 51.0 pence per share.
The insurer’s ability to improve its underwriting profitability and capture more market share during difficult trading conditions demonstrates that Admiral does enjoy a competitive advantage over its peers. Unfortunately, shares in Admiral seem more pricey than may of its peers. Based on analysts’ expectations that underlying EPS will be 97.6 pence for 2015, shares in Admiral Group currently trade with a forward P/E of 16.0. But Admiral’s shares do benefit from a prospective dividend yield of 6.0%.
Shares in Persimmon (LSE: PSN) have risen 52% over the past year, making the housebuilder one of the strongest performing shares in the FTSE 100. Buoyant property price and a pick-up in new-build construction has helped underlying EPS grow 43% to 78.6 pence in the first six months of 2015.
With the supply of new homes not keeping up with the pace of housing demand, property prices in the UK will likely continue their trend higher. The valuation of shares in Persimmon are appealing. Its forward P/E is 13.4, as analysts expect underlying EPS will rise 23% to 153.3 pence this year. Analysts expect earnings growth will be robust in the medium term. On expectations that underlying EPS will grow another 11% to 170.5 pence in 2016, its forward P/E based on those forecasts will fall to just 12.1.
Growing household disposable incomes in the UK should help Next (LSE: NXT) to deliver robust earnings growth over the medium term. But right now, Next has warned that 2016 could be its most challenging year for some time, as this season’s collection has not been as popular as had been expected.
Although growth for the retailer has been slowing down, this may only be temporary. Underlying economic conditions in the UK have not been so good for many years, and improving consumer confidence should serve act as a tailwind for its earnings outlook. Shares in Next have risen 8% over the past year, whilst the FTSE 100 has fallen by 10.5% over the same period. But, with Next trading at a forward P/E of 18.3, its shares could see some compression in its valuation multiples.
As with the other three companies, Homeserve (LSE: HSV) benefits from a strong domestic focus and benign underlying fundamentals. The home emergency repairs business benefits from being in a non-cyclical market and its growing scale has led to improving margins.
Homeserve has also been expanding in the US, France and Spain, but the UK business still represents an overwhelming majority of its profits. The company has some 2.1 million customers in the UK alone, and the company benefits from very high levels of customer loyalty. Its retention rate in 2014/5 was 83%, and strong customer loyalty helps the company to enjoy operating profit margins of nearly 15%.
Analysts expect underlying EPS will rise 8% to 20.5 pence this year, which means shares in Homeserve trade at a forward P/E of 19.8.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Homeserve. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.