Investment Column: Arm can not afford to have too many shocking results like this at its US arm

Sleepy Low & Bonar is worth holding - Thorntons needs to look tastier at this level
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The Independent Online

Shares in ARM Holdings are too expensive for the company to make a habit of disappointing the market.

The company's microchip designs are used by semiconductor manufacturers to improve the speed and efficiency of chips used in mobiles, laptops, MP3 players and a proliferation of digital devices. It makes money when it licenses its designs to chip makers, and again when the consumer devices hit the market and ARM gets a little royalty.

Licence sales are growing at double-digit percentage rates still, suggesting the long-term looks bright, but royalties ebb and flow with demand for semiconductors and the company is having a difficult year.

Results from Artisan, the US business which ARM bought for $1bn (£576m) last summer, were shocking. Artisan designs physical elements of the microchip, and its royalties fell by 27 per cent in the three months to 30 June from the previous quarter, when most analysts had expected them to rise. As a result, the group's revenues, in dollar terms, will rise 15-20 per cent this year, compared with earlier guidance of above 20 per cent.

It is not the first time that Artisan's results have disappointed. ARM protested yesterday that it bought the business for the opportunity to combine future designs, bringing benefits in four-to-seven years. While the City remains sceptical of the long-term rationale for the acquisition, ARM must stop appearing careless of the short term at Artisan.

One of the reasons ARM shares recovered most of their early losses yesterday was the company's promise to start buying back its shares. It has £155m in the bank, so has scope to act aggressively to shore up the price, although it was being coy yesterday about how much it will use. The other reason was that the benefits of a rising dollar, in which ARM conducts most of its business, cancels out the effect of the lower sales, ensuring profits will hit the market's forecasts.

The other reason is that it is licence sales, rather than royalties, which reflect the long-term outlook. ARM's shares trade on more than 30 times 2005 earnings, which won't worry long-term shareholders but, with the Artisan integration looking difficult, ought to warn off new investors for now.

Sleepy Low & Bonar is worth holding

There was another important step yesterday in the transformation of Low & Bonar from sleepy UK manufacturing business to, er, a slightly less sleepy UK manufacturing business.

It is selling its barely profitable plastic products (tanks and drums, hoppers and pallets, that sort of thing) to Atorka, the Icelandic investment company which owns 21 per cent of Low & Bonar shares. It allows Paul Forman, the chief executive, and his team to concentrate on the remaining flooring, yarns and fabrics businesses, where it at least has some useful product innovations to sell.

This is always going to be relatively low-margin stuff. No amount of dressing up of its products ("entrance systems" for doormats, for example) can disguise their mundane nature. But artifical woven grass (as used on Manchester United's training pitch) and floorings specially designed for nursery schools do have decent growth potential.

The aim is to make sure it is less at the mercy of raw materials prices, which trashed the interim results, also released yesterday, which showed profits down by nearly a third. The stock price, unchanged at 107p, is 17p higher than when we said "hold" in February 2004. With more restructuring and acquisitions to come, it is worth holding.

Thorntons needs to look tastier at this level

For Thorntons, just one thing is stickier than a piece of its toffee: the question of whether selling its goodies at Asda is a good idea.

As yesterday's trading statement showed, sales of Thorntons-branded chocolates in other retailers are the one bit of the business that is actually growing. Sales to outlets such as Woolworths and Sainsbury's more than doubled from £10m to £22.2m during the year to 25 June, while like-for-like sales in the 370 company-owned shops fell almost 1 per cent.

In flogging its premium chocs cheek by jowl with Asda's pick'n'mix, Thorntons knows it risks soiling its truffle of a brand. It also gives chocolate lovers one less reason to visit its outlets. Which is why Thorntons' own Willy Wonka, the chief executive Peter Burdon, decided earlier this year to put the lid on sales to supermarkets.

Instead, Mr Burdon has high hopes for the company's chocolate factory in Derbyshire, which makes 85 per cent of the treats Thorntons sells. He wants to wring costs out and boost margins by, for starters, being "more organised" about its production schedules. He is also revamping the product range to include fewer but yummier options.

Although Mr Burdon is more interested in profits than sales, he knows that for the long term he needs to spice up the group's core shops. But how? He is not entirely clear.

Total group sales rose by 5 per cent to £187.7m, putting City profit expectations of £8.3m within reach. But given the heady price-earnings ratio of 16 we remain unimpressed. Hands off the chocs.

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