The market has spent two years knocking Admiral Group Plc's (LSE:ADM) share rating down a peg, but Jefferies thinks it has gone too far.
The US bank has upgraded the Cardiff-based motor insurer from hold to buy, lifting its price target from 2,550p to 4,100p, which implies upside of 29%.
The turnaround comes after what analysts call “the great de-rating”.
Admiral’s price/earnings ratio, the multiple of profits investors are willing to pay for the stock, has fallen by 26% in absolute terms and 45% relative to the wider sector over two years.
In plain English, the market has grown much less willing to pay up for Admiral’s earnings even as those earnings have strengthened.
That disconnect is striking. Last year was Admiral’s most profitable ever, helped by a 15% jump in motor policies and wider margins than rivals.
Its cost advantage, meaning it can sell cover more cheaply than competitors while still making money, has widened to about 11 percentage points. On Jefferies’ numbers, earnings per share are set to grow by 8% a year between 2025 and 2027.
Regulation has been the worry. The Financial Conduct Authority is due to report by the end of the year on its probe into premium finance, the instalment plans many drivers use to spread insurance payments.
Ancillary income such as this accounts for less than a third of group earnings, yet Admiral’s shares have been priced as though that income could disappear entirely. Jefferies reckons the market is being overly punitive, not least since the FCA has already ruled out an outright ban.
At 3,276.8p (up 2.5%), Admiral trades on about 14 times this year’s expected earnings, near its historic low premium to peers. The dividend yield is a healthy 7%, rising to more than 8% on 2027 forecasts.