The Week In Review: ARM best kept at length for now
Saturday 22 April 2006
At the height of the dot.com boom ARM Holdings was a FTSE 100 company and its shares traded at a couple of hundred times earnings. These days the semi-conductor designer is a FTSE 250 constituent and is valued at 24 times forecast earnings for 2007. Yet even this more modest valuation is too rich.
The 17 per cent rise in first-quarter revenues that ARM reported this week looked impressive but failed to meet analysts' forecasts. Only thanks to good cost control did the company manage to hit its earnings targets. It appears that ARM is finding it increasingly difficult to achieve its sales forecasts. In July it cut projected growth to 15-20 per cent from more than 20 per cent. Then in October it again guided down estimates to the lower end of that range.
ARM makes money by licensing its designs to semiconductor companies and by getting a royalty each time one of the consumer devices containing its designs hits the market.
Traditionally it has done well from mobile phones, 90 per cent of which contain at least one ARM product, and digital cameras, where the level stands at about 50 per cent.
In the future, ARM aims to have a more diverse range of consumer goods running on its microprocessors coupled with the penetration it enjoys in the mobile phone market.
But that will take some doing. In the meantime, its licensing revenues are disappointing. Best avoided.
The temporary office space group Regus has bought back 58 per cent of its UK business from Alchemy for £88m. The purchase marks the end of Regus' recovery, but a word of warning. Regus has very high operational gearing. So when times are good they are really good, and when they are bad, life is truly grim. At current levels, that makes the stock just a hold while at the first sign of an economic downturn it should be ditched.
The online advertising sector is booming. It is growing at between 20 and 30 per cent a year and analysts forecast this trend will continue for years to come. Themutual.net is among a handful of AIM-listed companies cashing in on this explosive growth. Buy.
4imprint designs and distributes promotional goods such as golf balls and coffee mugs with company logos on them. 4imprint does this in Europe and the US. It may not sound exciting , but it is highly profitable and cash-generative. For the year ending 31 December 2005, the group made a pre-tax profit of £6.7m. This is forecast to rise to £7.3m in 2006 and to £8.3m in 2007. Buy.
Clarity Commerce Solutions hopes to pay a dividend at about this time next year. The group provides software to the hospitality and leisure sectors that helps operators manage their tills and check the performance of all their outlets. In the year to 31 March 2006, sales increased 14 per cent to £18m, but we don't yet know exactly how much profit has been generated. Wait for further clarity before buying.
MILLENNIUM & COPTHORNE
Anyone hoping to see M&C taken over by a larger hotel chain or carry out major asset disposals the way InterContinetal has done will be disappointed. M&C is 52 per cent owned by Kwek Leng Beng, its Singaporean chairman. Even so, on a long-term view, M&C offers good value. Its considerable freehold asset base underpins the company's value while management is doing a good job running the portfolio of 91 hotels. Hold.
Huntsworth, the international public relations group, is benefiting from all the deals being done in the City. It makes around 45 per cent of its sales from financial PR which sees the group earning juicy fees by spinning for the various parties involved. Trading at 12.5 times forward earnings, the shares offer good value. Buy.
European Goldfields has good news - its recently submitted business plans for the Skouries and Olympias projects have been endorsed by the Greek government. This development is a significant milestone for the company and validates its approach of working closely with both the government and local community. Buy.
Oil's well for shareholders who've struck black gold
Just as it looked as if things could not get any better at Soco International, the oil explorer put out a drilling statement this week saying its Vietnam prospect is likely to be even bigger than originally thought. The offshore project in the Cu Long Basin has become a serious asset for Soco, where two years ago the shares cost 320p. This week's news sent them soaring 87p to 1,317p.
In the oil business it is one thing to have a big reservoir of "black gold" but another to be able to get it out of the ground at a cost that allows the whole project to become commercially viable. It is on this point that Regal Petroleum came unstuck last year. But Soco will have no such problem. Its Te Giac Trang well in Vietnam boasts a flow rate of about 17,500 barrels of oil per day. That makes it a world-class well.
Soco shares will certainly lose ground should the company suffer a drilling disappointment at one of its sites. But on a long-term view, they look set to go higher. Hold.
The above recommendations are taken from the daily Investment Column.
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