Investment Column: Hold on to high-quality ARM Holdings
Provident Financial; Games Workshop
Wednesday 28 July 2010
Our view: Hold
Share price: 339.9p (-12.2p)
ARM's microchips power such a huge array of products that, though you may not recognise the company, you have probably tapped or touched your way through some zippy handheld or laptop that's driven by a chip designed or based upon the Cambridge-based group's technology.
ARM already commands the mobile phone market and is widely expected to make rapid strides as the youthful tablet computer market matures in the coming years.
Apple's iPad, which, incidentally, is believed to draw upon ARM intellectual property, is only the tip of the iceberg, with analysts anticipating a surge in the demand for tablets.
On Goldman Sachs's numbers, for example, though tablets are likely to make up only 5 to 10 per cent of the PC market in 2011-12, they may well end up commanding as much as 40 per cent within a 10-year period. Given ARM's track record and expertise, you don't need to be a mega-brained chip designer to recognise the potential for higher earnings at the company as a result of these developments. And a cursory glance at yesterday's forecast-beating results should further confirm the company's strengths.
So, is it time to buy? On a long-term view, the answer is fairly straightforward: yes, yes, yes. On a short- to medium-term view, however, we're more cautious. Our concern is down to the valuation, with ARM trading on a very fancy-looking multiple of 47.9 times Investec's forecasts for 2011.
Technology companies often trade at what would be considered inflated multiples in other sectors, but even given that fact, ARM's rating seems toppish. That said, we wouldn't sell. This is a fundamentally strong company with great prospects. While we worry that the stock may fall prey to profit-taking in coming months, we're equally confident that any dip in its share price will be temporary. So, buy if it shows any weakness, and keep holding in the meantime.
Our view: Avoid
Share price: 821p (-61.5p)
Ever since the coalition Government announced plans to take a very big axe to public spending budgets just after coming into power, this column has been nervous about the prospects of those companies that count the state among their biggest clients. But the collateral damage is likely to spread much wider.
Yesterday, announcing first-half numbers, the sub-prime lender Provident Financial said that it is "tempered by cautious customer behaviour", and that there is "uncertainty over the direction of the employment market". It is concerned about "the potential for unemployment to increase as a result of the Government's fiscal austerity programme". In other words "we're worried". There were some upbeat points. Peter Crook, its chief executive, said he was comfortable with full-year profit forecasts, helped particularly by the Vanquis Bank division, which saw profits jump by 82 per cent. The Government's pledge to lift those earning less than £10,000 out of income tax bands (over time) is also helpful for a business like Provident.
On a valuation basis, the dividend yield of 7.2 per cent is first class, and the multiple of 11.8 times this year's forecast earnings is undemanding. But with between 40 and 50 per cent of Provident's customers in regular receipt of benefits, which in the case of welfare and housing payments are set to see an especially sharp blade, we cannot back the group. Avoid.
Our view: Buy
Share price: 432.5p (+27.5p)
It has been an action-packed two years for Games Workshop, the maker of tabletop fantasy war games and miniatures. Faced with a recession, the maker of Warhammer ditched its dividend in 2008, cut costs, reduced capital spend and froze staff pay.
The share price of the company, which has 382 Games Workshop Hobby stores globally and also sells its products in nearly 4,000 independent toy retailers worldwide, tumbled to as low as 246.95p in early January.
But yesterday Games Workshop showed these battles are behind it by more than doubling pre-tax profits to £16.1m for the year to 30 May, boosted by a sharp jump in its gross margins.
Furthermore, cash generation improved markedly to leave it with net funds of £17.1m at the year end. These factors helped Games Workshop to reinstate its dividend with a 25p payment. While its shares trade on a forecast 2011 multiple of 12.3, ahead of the retail sector, it is a niche player and its miniatures have proved they are well-equipped for any economic battles. We sat back and held in January but the results give us confidence to buy again.
Fracking is turning the US into a bigger oil producer than Saudi Arabia
Missing Malaysia Airlines plane: Details emerge of two young Iranians using stolen passports in search for a better life
Three-quarters of Britons are saying it wrong - the top ten most common mispronunciations
Oscar Pistorius trial: Athlete's friend asked him if 'he was f***ing mad' after shooting through sunroof
How climate change helped Genghis Khan: Scientists believe a sudden period of warmer weather allowed the Mongols to invade with such success
Britain's top vet sparks controversy with call for ban on slashing animals' throats in 'ritual' slaughters for halal and kosher meat products
Exclusive: Impact of immigrants on British workers ‘negligible’
Katie Hopkins continues campaign to become Britain's most hated talking head with poorly timed Bob Crow tweet
Ukraine crisis: Russia pledges to 'retaliate against sanctions' as Ukrainian president says Crimea vote will not be recognised
The quiet diplomat: Catherine Ashton - recognised and admired in all the world’s troubled countries, yet ridiculed at home
Grace Dent: Who cares if she spells it Barraco Barner? Gemma Worrall is more employable than some bookish arts graduate
- 1 Three-quarters of Britons are saying it wrong - the top ten most common mispronunciations
- 2 Watch: The student election Macklemore parody that isn't completely awful - and all the others that are
- 3 Son attacks Apple after it refuses to unlock his late mother’s iPad
- 4 Grace Dent: Who cares if she spells it Barraco Barner? Gemma Worrall is more employable than some bookish arts graduate
- 5 First Kiss video: Filmmaker gets 20 strangers to make out on YouTube with awkward results
iJobs Money & Business
£57000 - £77000 per annum + Benefits: Pro-Recruitment Group: Top 10 Specialist...
£350 - £450 per day: Harrington Starr: Harrington Starr are currently working ...
£40000 - £60000 per annum: Harrington Starr: Application Support - FIX protoco...
£45000 - £60000 per annum: Harrington Starr: Application Support - OMS/EMS, FI...