Should I Buy Admiral?

LONDON -- It's time to go shopping for shares again, but where to start? Household goodie Unilever? High street favourite Marks & Spencer? Or punters' friend Lloyds Banking?

There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So, here's the question I'm asking right now: Should I buy Admiral (LSE: ADM.L  ) ?

The admirable Admiral
Motor insurer Admiral has come out with all guns blazing this year, its share price rising around 35% to 11.56 pounds, making it one of the top-performing stocks in the FTSE 100.

Admiral, which also owns price comparison site Confused.com, now has more than 10% of the U.K. car insurance market. So should investors hop on board?

Choppy waters
It hasn't been all plain sailing this year. Admiral's share price dipped in the summer, after its first-half results showed the number of vehicles it insured grew by 7% to just over 3 million. That performance sounds fine to me, but it marks a sharp slowdown from the 33% growth in the same period of 2011.

The revenue Admiral earns per car, including personal injury insurance and breakdown cover, went into reverse, falling from 86 pounds to 82 pounds. Chief executive Henry Engelhardt warned of tricky times ahead in the U.K. market, with falling premium rates and growing competition from rivals keen to carve out more market share.

Despite a 7% rise in group pre-tax profits to a record 171 million pounds, analysts declared themselves disappointed with the results, and the shares fell 10%. What do these people want?

Full steam ahead
They weren't disappointed for long. Buoyed by rising markets, Admiral Group has sailed ahead in October, leaving the summer slump in its wake.

I like to think that the markets realized they had overreacted to the negative bits in the half-year report, and grudgingly acknowledged that Admiral had actually just posted its eighth consecutive set of record results. The group had also boosted customer numbers 22% to 3.36 million, and increased its vehicle insurance count 13% to 3 million.

Admiral is also expanding on foreign shores, with the number of international customers rising a whopping 83% to 350,000. Add a 15% hike to the interim dividend, and the investment case remains strong.

Heave to!
There is plenty to admire about Admiral. I like the fact that it has its own price comparison site, which drives so much motor insurance business these days. At the last count, Confused.com generated an 8 million pound profit.

So, what could sink this stock? Well, the yield (excluding Admiral's special dividends) is just 3.2%, according to Digital Look. Furthermore, the price is trading on a forecast P/E of 12.7 for December 2012, which isn't very exciting. But that's what often happens when a stock has leapt more than 30% -- it is no longer cheap.

Regulation is also a worry. The Office of Fair Trading is currently investigating the car insurance market. Next year, personal injury referral fees will be banned.

So, the U.K. car insurance could be choppy in the troubled months to come. The time to buy Admiral is on one of the dips.

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Harvey Jones doesn't hold any stock mentioned in this article. The Motley Fool has a disclosure policy.
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