Investment Column: It is time to park Admiral
Thursday 03 March 2011
Our view: Sell
Share price: 1,655p (-53p)
If Compare The Market's meerkats and Go Compare's opera singer irritate you, then spare a thought for motor-insurer Admiral's chief executive officer, Henry Engelhardt. Those niggling campaigns for rival price comparison sites gave Admiral's Confused.com a tough time in 2010.
Mr Engelhardt admitted Confused's own ads were the aggregator's worst yet and that by the time they were scrapped the damage was done. It's sobering that an advertising bungle can cut a business's profit by 34 per cent in a year.
However, Admiral is very good indeed at selling its own UK car insurance. Increased sales and higher market rates in the UK drove annual group pre-tax profit up 23 per cent to £266m – slightly ahead of forecasts.
Admiral took advantage of rivals pulling out of the market to increase vehicle count and UK motor profits by one-third to insure about 10 per cent of Britain's motor cars.
As the flamboyant Mr Engelhardt put it: "It's a snowball going like a freight train. Downhill. Wow!"
Less impressive so far are Admiral's forays into foreign markets. The German business was sold in January this year after two years and thinly spread fledgling operations in Spain, France, Italy and the US racked up £12.9m of losses.
That's not a lot of money for FTSE 100-listed Admiral and full marks to the entrepreneurial Mr Engelhardt for giving things a go. The foreign operations may provide growth in the long run when Admiral starts to run out of steam in the UK, which is, after all, a mature market where competition will revive.
There are also concerns about whether Admiral can keep "ancillary" revenues from selling cover for breakdown, car hire and legal expenses motoring as cash-strapped customers tighten their (seat)belts. But despite Admiral's success story until now, at more than 20 times forward earnigns, we think the stock is too highly valued. Sell.
Our view: Buy
Share price: 357.4p (-16.6p)
Never mind that the shares dropped last night. Carillion's annual results came in above expectations, with underlying pre-tax profits up by 7 per cent to £122m, operating margins boosted to 4.2 per cent and plans to hike the full-year dividend by 6 per cent to 39.4p.
The future is equally bright, with an order book worth some £18.2bn and strong ambitions, including the doubling of revenues in its Canadian and Middle Eastern operations.
"Carillion has a resilient and well-balanced business mix, good revenue visibility and a record pipeline of contract opportunities," chairman Philip Rogerson said. "The board believes that Carillion is well positioned to make further progress in 2011 and to achieve its objectives for medium-term growth."
Analysts across the board seem to agree. And while the shares are down sharply in recent weeks on concerns over the Middle East, they are up by around one-third over the past year. Davina Mendelsohn, at Deutsche Bank, rates Carillion one of the cheapest support services stocks, with a forward earnings ratio of 8.8 times. That falls to nearly 8 times on the forecasts for 2012. Taken together with the strength confirmed by the results, this sort of valuation makes Carillion one to back. Buy.
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