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Why ARM Holdings plc Should Be A Winner Next Year

In my examination of next year’s prospects for the FTSE 100’s top shares, my attention has been drawn to ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US). What might 2014 have in store for the chip designer, and what do City analysts expect?

Here’s a look at the past five years of results from ARM, together with forecasts for this year and next:

  Pre-tax EPS EPS Growth
Dividend Div Growth
Div Yield Div Cover
2008
£63.2m 5.66p 110% 2.20p 10% 2.5% 2.6x
2009 £47.3m 5.45p -4% 2.42p 10% 1.4% 2.3x
2010 £110m 9.34p 71% 2.90p 20% 0.7% 3.2x
2011 £157m 12.72p 36% 3.48p 20% 0.6% 3.7x
2012 £221m 14.93p 17% 4.50p 29% 0.6% 3.3x
2013*
£290m 20.68p 38% 5.43p 21% 0.5% 3.8x
2014*
£351m 25.05p 21% 6.72p 24% 0.7% 3.7x

* forecast

Now that is, obviously, a pretty good record for profit growth.

There’s dividends, too!

What most people won’t expect is that ARM actually pays reasonable dividends too — paying out around a third of earnings per share (EPS) is pretty good for a company that many will think of as an out-and-out growth share.

The yield isn’t great, sure, but that’s only because the share price has soared over the past few years — back in 2008, there was a 2.5% yield. For the full year this year, which is just a few weeks away, the shares are on a prospective P/E of 48 based on today’s share price of 1,003p, and that’s about 3.4 times the FTSE average.

But once ARM goes ex-growth, its P/E will surely fall a lot closer to the average, and if we were to assume that had already happened this year then we’d be looking at an equivalent share price of just 295p (the actual 1,003p divided by 3.4). And that would put the 2013 prospective dividend yield at 2.3%, which isn’t bad. Of course, by the time ARM really does come close to ex-growth it will almost certainly be paying a higher proportion of its earnings as dividends, so we’re likely to get a better yield than that.

Back to growth

But what of that share price? Well, over the past five years it has multiplied 12-fold — the FTSE 100 is up a trifling 60% over the same period.

Will that growth continue? That depends on how demand for ARM’s technology is likely to go. Here’s a quick look at the number of licences signed and the total number of ARM-based chips shipped per year over the past five years:

Year Licences Chips
2008
+61 4.0 billion
2009 +87 3.9 billion
2010 +91 6.1 billion
2011 +121 7.9 billion
2012 +110 8.7 billion
2013* +95 7.5 billion

(*Q3 year-to-date)

By the end of 2012, ARM had snagged a total of 954 processor licences, and in that year alone there were more ARM-based chips made than there are people on the planet!

And by third-quarter time at 30 September 2013, ARM had agreed 95 new licences and the world had taken delivery of another 7.5 billion ARM chips — pro-rata, that would suggest 127 new licences and 10 billion chips by year-end.

Do you think the growth in demand for processor chips, especially for the booming mobile market, is likely to slow down any time soon? I don’t, and I reckon the City analysts are right on the money with their winning predictions.

Verdict: More of the same for 2014!

And finally...

When you think ARM, you have to think telecoms too, as that market supports the lion's share of ARM sales. But how are BT and Vodafone, the two big guns in the sector, doing?

If you want a head-to-head comparison, get yourself a copy of the "Motley Fool's Guide to Investing in Telecoms" -- did you know, for example, that BT enjoys nearly four times as much revenue per customer as Vodafone?

Click here to find out more.

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