This FTSE 100 company looks undervalued to me

There are plenty of great companies on the FTSE 100, but when I see one as potentially undervalued as this, I get very interested.

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Admiral (LSE:ADM), a stalwart of the FTSE 100 index, has long been a giant in the insurance industry, but with a fairly flat performance in 2024 to date, I believe the shares might be in an interesting position. Let’s take a closer look.

An insurance giant

A major player in the UK, Admiral also operates in the US and Europe. It offers a wide range of insurance products, as well as personal loans.

Adding to the allure is Admiral’s impressive track record of shareholder returns. 2024 has admittedly been fairly unremarkable for investors so far. The shares are down 0.1% year to date, but over the past year, they’ve soared by 27.8%. This has substantially outperformed both its industry peers and the 8.1% of the broader FTSE 100. This outperformance demonstrates the company’s resilience and ability to navigate challenging market conditions.

To me, one of the most compelling arguments is a pretty major undervaluation in my favourite metric. According to a discounted cash flow (DCF) calculation, the shares are trading at a whopping 41% below estimated fair value. Although this value is far from guaranteed, this substantial discount suggests there could be significant potential for investors willing to take a long-term view.

While the shares appear undervalued based on these metrics, potential investors should definitely consider the broader economic environment and industry-specific challenges. The insurance sector is very competitive and subject to regulatory pressures, which could impact future profitability, and is likely the reason for the wide gap between the current price and my calculated estimate.

Strong fundamentals

The financials also paint a picture of stability and growth. With a market capitalisation of £8.2bn and trailing 12-month revenues of £3.51bn, the firm has established itself as a formidable force in the insurance sector. Its price-to-earnings (P/E) ratio of 24.2 times, while not cheap by traditional standards, could be justified by its growth prospects and market position.

Speaking of growth, analysts forecast annual earnings to grow at a healthy clip of 13.01% for the next five years. This steady projected growth could provide the catalyst needed to bridge the gap between the current market price and the stock’s intrinsic value.

For income-focused investors, the business also offers an attractive dividend yield of 3.78%. However, it’s worth noting that the dividend is not well covered by free cash flows, which could be a potential risk factor to monitor.

Worth watching

Under the leadership of CEO Milena Mondini-de-Focatiis, the firm has been expanding its digital capabilities and exploring new markets. The recent acquisition of RSA Insurance Group’s UK direct home and pet insurance operations demonstrates the company’s commitment to growth and diversification.

Overall, Admiral’s current valuation, coupled with its strong market position, solid returns, and growth prospects, make it interesting, I feel. Although far from the most exciting company on the market, there’s always going to be demand for insurance products, and I think this FTSE 100 giant could be a valuable part of my portfolio over the coming decades. I’ll be adding it to my watchlist for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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