Investment Column: It's smart not to cash in your chips at Arm
Thursday 28 April 2011
Our view: Buy
Share price: 615.5p (-10p)
Consumers may know little about Arm Holdings, but many benefit from the blue-chip semiconductor group's designs every day. Its super-smart chips drive almost every smartphone on the market and its reach is now expanding well beyond advanced mobile phones.
Yesterday's trading statement revealed yet another successful quarter for the Cambridge-based company, with revenues surprising analysts by rising 26 per cent to £116m year on year. Profits were up 35 per cent to £50.8m. KBC analysts had expected a slow-down after the company's strength in 2010 "but the first-quarter results to March suggest it has actually accelerated".
Beyond the strong numbers posted many were heartened by its recent licence wins. The company saw a further 39 licences signed in the quarter – outstripping the already impressive 35 three months earlier – with new contracts from companies including LG Electronics and Broadcom.
Arm started life as Advanced RISC Machines, a joint venture between Acorn Computers, Apple and chip company VSLI Technology in 1990. These days, the group licenses the blueprints of its chips to groups including Intel and Texas Instruments and receives royalties on the devices sold. The low power required to run Arm chips makes them especially popular for smartphones and tablets.
The growth of both markets means higher revenues for Arm, and the smarter these devices become, the more Arm chips tend to be used. As chief financial officer Tim Score said: "Arm is very well placed in this market" with over 1.1 billion of its chips were shipped into mobile devices in the first three months of the year.
It is winning new clients all the time, and the group's shares lifted earlier this year as Microsoft revealed it would use Arm chips in its devices. The company can also benefit from the rise in other connected devices.
Its chips are now in televisions and set-top boxes as well as heart monitors, and some of the older designs are even being used in washing machines.
There is some bad news. The Japanese disaster is a downside factor, while Intel has decided it wants to take the company on with the launch of a tablet chip of its own. The stock also trades on a huge multiple, which KBC Peel Hunt estimates at 54 times its estimated earnings for 2011. Yet the analysts admit the company is "firing on all cylinders" and has "significant growth opportunities beyond mobile".
The Independent has Arm as one of its stock picks for the year, and we continue to stand by it even though some analysts believe the growth of the smartphone and tablet industry is priced in. It is a strong performer, which has made an encouraging start to this year. Buy.
Our view: Buy
Share price: 150.3p (-2.7p)
With the stock having increased more than 260 per cent over 2009 and 2010, investors in Senior cannot be blamed for feeling a little disappointed that this year has seen the industrial manufacturer fail to push on. Nonetheless, yesterday's interim management statement from the group made for fairly encouraging reading, with the group revealing a better performance over the first three months of 2011 than the same period a year previously.
Importantly, in its areas of strength it appears as if things look likely only to get better. Senior's aerospace unit, which provides more than half its sales, is expected to benefit this year from an uptick in the aircraft construction, a trend which is seen by many to continue into 2012 and beyond. Meanwhile, the global truck market is also expected to see a recovery and is another market where the group looks well placed to benefit, particularly in the US.
There were also positive comments in the update over its recent acquisition of Damar Machine, and at least one further purchase looks likely as well as beneficial. Caution was sounded over possible future supply chain issues thanks to last month's tragedy in Japan, the effects of which will surely be a focus of its half-year figures in August. Yet if there are no nasty surprises then an upgrade in forecasts is possible, suggesting that its performance so far this year has been little more than a pause ahead of further gains in the long-term. Buy.
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