The Investment Column: ARM's long-term benefits are clear
Curtain set to rise on the Colefax revival; Plenty of wallop still to come at Punch Taverns
Thursday 27 January 2005
When ARM Holdings unveiled the biggest acquisition in its history last August - the $1bn (£530m) purchase of the Silicon Valley-based Artisan - investors couldn't understand the point and certainly couldn't justify the price.
But frankly, it is pretty difficult to justify the share price of ARM itself on conventional medium-term measures, so when shareholders got over their surprise, they began also to understand the long-term benefits. They are as follows.
ARM designs software used on microchips for mobiles, laptops, MP3 players and other digital devices. Artisan designs other elements of the microchip. Together the two can design larger chunks of the microchip. Semiconductor companies can use these off-the-shelf designs, freeing up time and money to spend on designing more important bits of the chip.
The doubters have been won round. The shares have recovered. The deal is likely to reap rewards in the long term: ARM has to design the new products, semiconductor firms must license them, design products incorporating them and get them used in new consumer electronics products. We are talking more than a decade until significant royalties from end products come in, but ARM will get licensing fees along the way.
So, having bought the story, investors were shocked yesterday at news of appalling results from Artisan in the final three months of last year. There is an explanation - Artisan deliberately slowed work with existing customers until ARM took formal control in December so the delayed revenues will flow directly to ARM - but it is as if the jury has gone back out again on the deal, and ARM shares tumbled.
None of which will matter to the very long-term investors who can use all these flurries as a buying opportunity. Those with a one-year horizon are advised to steer clear. With the short-term valuation of ARM sky high (six times 2005 sales, 25 times earnings), the stock is vulnerable to shocks as semiconductor sales growth slows and digital gadgets come down in price, cutting ARM's royalty rates.
Curtain set to rise on the Colefax revival
Luxurious, flower-patterned wallpapers and curtains are the height of interior design chic this decade. But somehow Colefax, the little company which owns the historic Colefax & Fowler and Jane Churchill brands, has struggled to take advantage in the last few years. Sales, profits and dividends have all been stagnant.
Yesterday, the company posted a pre-tax profit for the six months to 31 October of £1.82m, up from £1.76m the previous time. The dividend has been held again.
Yet there are stirrings. In the US, which accounts for 55 per cent of group sales, the decline in the dollar has masked a real revival. The interim period showed 12 per cent sales growth, in the local currency, and the company has just opened a showroom in Washington DC, which ought to push things further.
Europe will continue to be difficult, the UK pedestrian, but even here the fashion trends ought to prevail.
The lack of obvious growth prompted an ill-advised sell recommendation from us two years ago, but the cash has kept coming in to the business, and it has bought back shares. The stock, at 103p, has a 3.3 per cent dividend yield. Hold.
Plenty of wallop still to come at Punch Taverns
Your local boozer may well be a Punch Taverns pub, and you probably wouldn't know it was part of one of the biggest pub groups in the UK. Punch doesn't go in for chains or brand names. Its landlords run their pubs as their own, but pay rent and buy beer from Punch.
Following an acquisition spree over the past 18 months, Punch has nearly doubled in size to 7,800. It wants another 2,000 pubs, and with pub property values rising, sellers are being lured to the market.
There is a risk of overpaying, then, but the value of Punch's estate is also rising along with the market, giving it more to spend and improving returns when it sells off under-performing pubs.
Acquisitions aside, it has also proved it can deliver organic growth. It yesterday said underlying sales were up 2 per cent in the 20 weeks since August. Its healthy cash flow - around half its turnover - is used to invest in the estate and this cash also makes its £3bn of debt, which arose when Punch bought the Pubmaster business in 2003, easily manageable.
Punch's residential, community-situated venues are sheltered from the binge drinking row swirling over high street chains. The prospect of having to ban smokers from its venues in 2008 is a threat to trade, but at least landlords have a long time to prepare.
We lost our nerve after the shares' strong run last January, advising readers to lock in their profits. They have since resumed their rise, to a near-record 667.5p yesterday, and there are still substantial opportunities ahead. The company bought another 1,000-strong portfolio as recently as September. Buy.
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