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Why ARM Holdings plc Will Be One Of 2013’s Winners

How many shares do you know that can slump by nearly a third midway through the year, yet still be 30% up going into November?

Well, that’s what happened to ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) this year — between 21 May and 24 June, the share price crashed 32%. Yet it’s enjoying a resurgence that should see it end 2013 in the winners’ enclosure.

The slide

After reaching a peak of 1,111p on that fateful day in May, the shares went into a slow slide all the way down to 752p just a little more than a month later — taking its year-to-date progress close to a big fat zero percent. Surely it wasn’t just ARM’s analyst and investors day, held on 21 May in London, that did it?

Well, those were the days when panic over the possibility of US economic stimulus tapering was seriously starting to set in, and high-growth shares like ARM are usually amongst the first to suffer if there’s even a hint of bearish sentiment in the air. And even after the plunge, at 752p ARM shares were still on a forward P/E of 37 based on full-year forecasts at the time.

Right back up again

But since bottoming out, ARM shares have put on a 28% spurt to reach 977p — taking them to a 30% gain for the year to date, up 40% over a rolling 52-weeks, and nicely outstripping the FTSE.

Since then we’ve had interim results, released in July. We saw a 26% rise in second-quarter revenue over Q2 2012 to £171m, with pre-tax profit up 30% to £86.6m and earnings per share (EPS) up 37% to 4.89p. ARM’s interim dividend was lifted 26%, though with annual yields of only around 0.6% it’s not one for income-seekers just yet. At the time, ARM said it “enters the second half of 2013 with a record order backlog and a robust opportunity pipeline“.

Then came third-quarter figures in October and we saw more of the same, with Q3 revenue up 26% to £184m, pre-tax profit up 36% to £92.6m and EPS up 38% to 5.11p. ARM said it “enters the final quarter of 2013 with a record order backlog and a robust opportunity pipeline“.

Full-year forecasts

City analysts are currently predicting a 38% rise in full-year EPS to around 20.6p per share. That would put the shares on a forward P/E of 47, which is more than three times the FTSE average of 14 — that 20.6p EPS would have to grow to more than 60p to bring ARM’s P/E down to match!

Is that feasible? Well, if forecasts prove accurate, ARM will have multiplied its earnings nearly four-fold since 2009. And with no sign of any end to the demand for mobile processor chips — ARM’s designs are used by most of the industry leaders, including Apple for its iPads and iPhones — a repetition is by no means out of the question.

One day ARM’s growth will slow and it will hopefully start to turn into a mature dividend-payer — and the share price will almost certainly slump again.

But it’s surely not going to be this year — no, ARM looks well set to be one of this year’s winners.

And finally...

If you want another share that is having a great 2013 but with a lot less volatility than ARM, you should get a copy of the Motley Fool's Top Income Share report. It's a company that has breezed through the recession and has just kept on handing out fat dividend payments -- and it offers a very tasty 5.5% yield for the current year.

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> Alan does not own any shares mentioned in this article.