Investment Column: ARM is pricey but its potential is strong

Computacenter; Topps Tiles
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The Independent Online

Our view: Hold

Share price: 497.5p (+32.5p)

ARM, one of our share tips for the year, is one of the strongest companies on the FTSE 100. The chip designer has managed to go from being at the cutting edge of the mobile phone world when that market was still in its infancy to leading the pack when it comes tablet computers, the hottest thing since, well, mobile phones.

The roster of ARM-based devices is, quite simply, astonishing. Name a fancy gizmo and chances are that it draws upon ARM's know-how in one way or another. iPads, iPhones, the Blackberry Bold – all feature ARM technology. The other day, Microsoft said it was going to launch a new version of Windows, one that is compatible with ARM-based devices. The announcement opens the door to fatter revenues as an ARM-friendly Windows operating system will mean that the Cambridge-based group's technology can be used in a whole host of new devices.

The shares have done pretty well since the beginning of January. Though we are just days in to the New Year, they are already up more than 15 per cent as investors cheered the Microsoft announcement. Earlier this week the analysts at Peel Hunt highlighted the fact that ARM was trading on a fairly hefty multiple of 47 times forecast earnings for 2011.

Part of the recent uptick has been pinned on bid prospects, which, ordinarily, might help offset the bloated valuation. But we doubt ARM will be taken out. It makes little sense for Apple or Intel, the most frequently rumoured suitors, to buy it as such a move would put a question mark over ARM's relationships with other customers.

In light of recent gains, then, we would not be buying more at this point, but the strength of the business means that the market is likely to keep the shares on firm footing as other companies battle with what remains an uncertain economic backdrop. Hold.


Our view: Buy

Share price: 420p (+35p)

That Computacenter's shares rose after the IT firm issued its trading statement last night should surprise no one. After all, the company said full-year profits would be at the top end of market hopes thanks to clients resuming spending on IT.

Customers who slashed spending in the year before last finally took a second look at their IT systems in 2010, driving business for Computacenter. This trend should continue to support profits this year, as many companies are still in recovery mode. The main caveat is the direction of the wider economic environment. Investors should bear in mind that the recovery could yet come to nothing if the economic headwinds get stronger.

That said, Computacenter benefits from an undemanding valuation. The balance sheet and cash position are strong, but the stock trades on just 11.9 times forward earnings, according to the analysts at JP Morgan Cazenove. This means that Computacenter is being valued in line with the wider IT services sector, which is also on 11.9 times. The market is being unduly harsh on a stock that, in our view, deserves to trade as a premium to its peers. Pile in now before others wake up. Buy.

Topps Tiles

Our view: Take profits

Share price: 79.5p (+1.25p)

Have Topps shares reached their summit? Not in the view of the City which was quick to praise what looked like a good set of numbers unveiled at the retailer's annual meeting yesterday. The buy notes duly followed.

But before rushing in, here's a note of caution. Topps's figures tend to bear some relation to the housing market, being linked to transactions. And the housing market remains torpid with prices set to fall over the coming year. That's not terribly surprising – a house move usually involves at least some redecorating. But people just aren't moving at the moment – no surprise given the austerity facing everyone outside the gilded band of bankers in the City of London.

All the same, Topps Tiles looks to be in good heart with sales at stores open for at least a year up 2.2 per cent. Interestingly, however, that fell to 1.8 per cent including new store openings, suggesting that the new outlets haven't been doing that well. Usually, with retailers, it's the other way round.

With 312 stores at present, but a target of 400, there's plenty of room for growth at Topps. But at 12.2 times 2011 forecast earnings, the shares no longer look as cheap as they did when we advised a hold at 54.5p in April. Given the uncertainties, we'd take profits.