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Should I buy or sell Admiral Group shares in 2022?

by | Last updated 26 Nov, 2022 | Financials

Admiral Group Plc (LSE:ADM) shares haven’t been delivering the best performance lately. In fact, the stock price has dropped by nearly 40% in the last 12 months on the back of mixed results.

But are the problems plaguing the business short-term creating a buying opportunity for my portfolio? Or should I be steering clear of this business?

What does Admiral do?

As a quick reminder, Admiral Group is one of the largest British automotive insurers. But aside from motor insurance, it also offers additional financial products such as travel and household insurance.

Customers pay a monthly or annual premium in exchange for financial protection should a disaster strike. The group then takes these premiums to fuel investments and grow the capital base.

Founded in 1993, the group has rapidly expanded its operations across the United Kingdom, Spain, Italy, France, Canada, the United States, and even India. Today it employs over 11,000 members of staff worldwide, with a reputation for maintaining a good corporate culture. In fact, it was voted 17th Best Workplace in Europe.

Key financial information 

The latest interim results for 2022 were a bit of a mixed bag.

The company reported a total pre-tax profit of £251m. That’s 48% lower than a year ago, so it’s pretty easy to see why some investors have been fleeing from the hills. What happened?

This wasn’t a case of losing customers. In fact, the group’s total customer base actually increased to 9.11 million, pushing the total turnover up by 6% year-on-year. The problem stems from inflation.

Due to the continued demand for vehicles paired with restricted production courtesy of the semiconductor shortage, car values have actually been increasing. This, in turn, has boosted the cost of repairs, making legitimate insurance claims more expensive to process.

The company has begun offsetting these costs by raising premiums. But with a vast number of competitors, its pricing power appears to be somewhat limited. As a reminder, in the insurance industry, most customers don’t show loyalty to brands over finding the cheapest policies.

A similar story exists for its Household and Travel insurance divisions. Despite more policies being issued, the profits are tumbling.

In time, the pressures of inflation will naturally alleviate. And I suspect the group will be able to get its UK insurance business back on track from an earnings perspective. This opinion seems to be shared by the management team, given they continue to offer an impressive dividend yield of 4.26% to shareholders.

RELATED: Top 10 UK dividend stocks with the highest yields

Admiral share price performance

After the bearish trend seen this year, the Admiral share price currently trades around 1,920p. But looking at its 52-week range, it’s reached as low as 1,691.5p.

At today’s valuation, the market capitalisation of Admiral shares stands at just over £6bn, placing the P/E ratio at 15.5. That’s just slightly ahead of the stock market average, but is this a good price for investors to pay?

It seems analysts can’t entirely agree. The average 12-month broker forecast for this insurance stock stands at 2,200p – roughly 11% ahead of its current share price. However, not all broker forecasts are as optimistic, with several analysts issuing “Sell” recommendations and a price target as low as 1,625p.

Looking to the future

Admiral Group is advancing toward digitalisation and managing its data and sustainability challenges by availing of the services of Pure Storage.  Pure Storage is a provider of enterprise data flash storage solutions.

Admiral Group is building the foundation for a new digital version of the organisation. The company has shifted to all-flash storage, which has cleared the way for significant data centre optimisation. As a result of this digitalisation, the insurance company reduced business transaction time with a 98% speed increase.

This may not seem all that important to investors. But providing faster and more streamlined service improves customer experience. And given the fickle nature of individuals buying insurance, making the process fast and easy could have immense intangible value, in my opinion.

Perhaps that’s why it continues to attract millions of additional customers even during times of economic turmoil.

Are Admiral shares a good investment?

The recent performance of Admiral shares hasn’t done much to keep investors happy. But while the sudden drop in profitability is frustrating, it appears to have been triggered by a temporary external force beyond the group’s control.

The short-term disruptions may have caused investors to become overly pessimistic, especially since management has already begun taking action to rectify the situation.

It’s clear the demand for the group’s insurance products remains high, as seen by the rising customer figures. And with four consecutive years of dividend growth under its belt, the business seems to know how to maintain shareholder value. At least, that’s what I think.

Therefore, personally, I see the latest drop in Admiral shares as a buying opportunity for my portfolio.

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Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.

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