Safe-haven status makes ARM pricey

ARM; Prowting; Harvey Nash
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The Independent Online

Are financial analysts too conservative in their forecasts for the chip designer ARM? Is Robin Saxby, ARM's chairman, a master at talking forecasts down to easily achievable hurdles? Or is ARM a genuinely record-breaking business?

The chip designer has consistently beaten profit expectations and yesterday's third-quarter figures upheld that record. In the three months to 30 September, ARM recorded a pre-tax profit of £12.9m, up 4 per cent from the second quarter, on sales of £37.6m, up 6 per cent.

As predicted, royalty revenues from gadgets containing its technology were flat during the second quarter and are expected to stay flat in the current quarter. Licensing revenue, ARM's main driver, was £21.8m, up from £18.5m in the second quarter. Gross margins were steady at 89 per cent and the company said it was still seeing "high demand" for its products and services. It has £102m of cash in the bank and the outlook for the rest of the year is still fine.

Investors should not read too much into the board rejig, which saw Mr Saxby split his chairman and chief executive role. Warren East, previously chief operating officer, is the new chief exec. The reshuffle, which has been on the cards for some time, should not be viewed as Mr Saxby preparing his exit.

The only fly in the ointment seemed to be sales of services and development systems, which fell, and the money it has to keep shelling out in its legal battle against PicoTurbo.

ARM's ability to beat expectations, through boom and bust in the semiconductor industry, has made it boringly predictable and its safe haven status is the only rational explanation that can be given for its stratospheric valuation.

Last night's 308.75p close puts the company on a multiple of 72 times 2002 earnings, 94 times in the current year. While some premium is probably justified, ARM is clearly expensive and shouldn't be chased.


Worrying signals from the housing market. Prowting, a southern England and west Midlands builder, yesterday set out the impact of the events of 11 September on reservations for its new homes. These had been 6 per cent up on last year in the week before the attacks but have slid week by week since. Last week it was down an estimated 20 per cent on 2000.

That's disturbing because Prowting, like much of the industry, needs strong autumn sales to meet market expectations for the full-year. Interim results yesterday showed pre-tax profits up 10 per cent to £13.1m, but the house broker had to shave its forecasts and now expects the gains to be erased in the second half as Prowting introduces special offers to tempt back the buyers.

While it is true that the fundamentals of the housing market have not changed, with low interest rates and a shortage of available land keeping the squeeze on prices, the risks of a downturn are increasing. The downside for Prowting shares should be limited because its lowly rating – 5.5 times the new earnings forecast after the shares fell 10p to 135p yesterday – could make it a juicy takeover target. But there is little reason to buy.

Harvey Nash

Harvey Nash, recruitment consultant to the telecoms and IT sectors, has "cut the fat, but not the muscle" in recent weeks. It has axed 90 jobs, 20 as a direct result of the sudden ratcheting downward of market activity after 11 September. A £1.6m restructuring charge pushed interim results £1.1m into the red, compared to a £5.8m profit last time. Now the company is promising to run a cash-neutral strategy and sit tight in anticipation of an upturn after the middle of next year.

Well, fingers crossed. Its assumptions are based on an economic upturn next spring, with recruitment picking up three months later. But the IT sector's problems are ones of overcapacity rather than just cyclical, and if Harvey Nash is wrong it will find cutting jobs in Europe a long and expensive task. Down 12p to 112.5p, the shares do not reflect the risks.