Investment Column: Buy ARM when the chips are down

Take a share in benefits of WH Ireland's growth; Best may be over for Cattles as rates rise

It was a very frustrating day for Robin Saxby and Warren East, the chairman and chief executive of ARM Holdings yesterday. The microchip designer released a perfectly good set of interim results to the market, but watched as the shares fell like a stone. Investors are obsessing about a possible slowdown in the chip sector and disregarded ARM's protests that it operates in a faster-growing part of the industry and that, far from seeing a torrid time ahead, it is confident enough to invest in more research, more product development and more staff.

The management's case is this. ARM's technology - which allows mobile and digital devices to operate faster while using less battery power - is far removed from the PC processors created by Intel, whose disappointing trading updates have put the fear into investors. Royalty revenues from sales of products that use ARM chips were a real highlight yesterday, up a third in the first half, and sales of wireless devices and networks and digital cameras are going to continue to trend strongly upwards in the coming years. Meanwhile, ARM has also seen robust growth in licences of its new generation of chips, which the consumer electronics giants will try to incorporate into future products. Licence income was up 16 per cent.

ARM's finances are as strong as its technology is ubiquitous in phones and other mobile devices, and this will win out for shareholders. This was the basis of our "buy" recommendation in January, which was made on a five or 10-year view.

The bears that drew blood yesterday, though, are right to point to the possibility of a sharp sell off in the shares in the short term. They are very highly rated, and will be punished if the company missed forecasts. Yesterday's 7 per cent fall came just because there was no reason to improve profit forecasts.

So use the coming weakness as an opportunity to pick up the shares, stash them away, and try not to worry.

Take a share in benefits of WH Ireland's growth

The surge in activity in the stock market in the early months of 2004 meant WH Ireland, the Manchester-based stockbroker, was able yesterday to post its best interim results ever, outstripping even the boom-time results of 2000. Better still, Laurie Beevers, the chief executive, was sticking to his optimistic view of the rest of the financial year, despite the summer collapse in share trading volumes, which seems to have been worse than ever this year.

The company, which has had a presence in Manchester for 150 years, has been enjoying a period of careful expansion since listing in 2000, and now does substantial business for private and institutional clients out of Birmingham and, most recently, Cardiff. Turnover in the six months to 31 May more than doubled to £8.1m, and the company swung back into the black with a £688m profit, compared with minus-£160m last time.

Mr Beevers' expectation is that, while institutional investors are taking a break after a glut of new issues and private clients are holding fire while worries over economic growth persist, both have the cash to invest when the City gets back to work in the autumn.

That confidence is one reason to buy the shares, off 3p at 74.5p yesterday. Another is is WH Ireland's growing reputation as a corporate financier. A third is the company's determination to generate greater interest in the shares.

Best may be over for Cattles as rates rise

Cattles has moved on from its days as a door-to-door moneylender. The consumer credit company's customers are still those with poor credit histories, but most business is done now through local offices and direct debit repayments.

The company continues to expand, in line with the UK consumer's taste for borrowed money. Cattles yesterday said it has raised £500m from a consortium of banks, mostly to repay existing loans, but also to fund £150m of new lending.

How secure is this growth story now that interest rates are rising substantially?

The chief executive, Sean Mahon, made great play yesterday of the fact that the group's borrowings are set at fixed rates or hedged against the impact of rising rates.

But investors' main fear is not over what higher rates will do to the company's cashflows, but what they will do to its customers'. Bad debts have so far kept steady, but could well rise.

And demand for extra credit might go into reverse if the nation dons a hair shirt.

Trading at less than than 10 times next year's earnings, the stock admittedly looks cheap, and shouldn't be sold while the going is this good. But you'd have to be a brave investor to get involved with this one in the current market. Hold.

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