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
ebooks
ebooksAn introduction to the ground rules of British democracy
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

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life
Football Beyond Borders: Even the most distruptive pupils score at homework club

Education: Football Beyond Borders

Add football to an after-school homework club, and even the naughtiest boys can score
10 best barbecue books

Fire up the barbie: 10 best barbecue books

We've got Bibles to get you grilling and smoking like a true south American pro
Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

Nick Bollettieri's Wimbledon Files

Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

‘This is one of the best McLaren teams ever – we are going to do it’

Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most