Investment Column: Hold on to high-quality ARM Holdings

Provident Financial; Games Workshop


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.

Provident Financial

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.

Games Workshop

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.

Start your day with The Independent, sign up for daily news emails
News
Ben Little, right, is a Labour supporter while Jonathan Rogers supports the Green Party
general election 2015
News
The 91st Hakone Ekiden Qualifier at Showa Kinen Park, Tokyo, 2014
news
Life and Style
Former helicopter pilot Major Tim Peake will become the first UK astronaut in space for over 20 years
food + drinkNothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
News
Kim Wilde began gardening in the 1990s when she moved to the countryside
peopleThe singer is leading an appeal for the charity Thrive, which uses the therapy of horticulture
Sport
Alexis Sanchez celebrates scoring a second for Arsenal against Reading
football
Life and Style
health
Voices
An easy-peel potato; Dave Hax has come up with an ingenious method in food preparation
voicesDave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
News
i100
News
Japan's population is projected to fall dramatically in the next 50 years (Wikimedia)
news
Life and Style
Buyers of secondhand cars are searching out shades last seen in cop show ‘The Sweeney’
motoringFlares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own