Is ARM Holdings plc Still A Buy After The 2013 FTSE Bull Run?

ARM Holdings plc (LON:ARM) continues to perform, but is its valuation a stumbling block for today’s buyers?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.

Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8% this year, and is 52% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) still offer good value, after five years of market gains.

Back to basics

ARM Holdings share price has gained 22% this year, leaving it 1,036% higher than it was in December 2008.

However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.

As potential buyers of ARM, we need to decide whether the firm’s shares offer new buyers any value, or whether they are likely to crash at the first sign of any slowdown in the firm’s growth. Here’s how ARM looks, based on its performance over the last 12 months:

Ratio Value
Trailing twelve month P/E 52.8
Trailing dividend yield 0.5%
Operating margin 36.0%
Net gearing -50%
Price to book ratio 10.2

Don’t get me wrong: ARM is a fantastic company, that should be a model for more British businesses, but it’s worth pointing out that despite its £13bn market cap, it only generated £160m of profits in 2012.

Although ARM’s balance sheet is very strong, with no debt and £670m of net cash, that’s an awful lot of jam tomorrow. Given ARM’s trailing P/E of 52.8, and its paltry 0.5% yield, I cannot see a good reason to buy ARM shares at the moment.

Double-digit growth in 2014?

ARM’s trailing-twelve month earnings per share of 19.4p suggest that it will have no problem delivering on 2013 consensus forecast earnings of 20.9p per share. Analysts are bullish on 2014, too, as the figures below show:

ARM Holdings 2014 Forecast Value
2014 forecast P/E 40.1
2014 forecast yield 0.7%
2014 forecast earnings growth 22%
P/E  to earnings growth (PEG) ratio 2.0

I wouldn’t be at all surprised if ARM hits or even exceeds its earnings targets next year, but this growth trajectory is unlikely to last forever, and when it ends, I fear the resulting losses for recent buyers of ARM shares could be large.

For example, if ARM shares fell so that they traded on a P/E of 25, based on 2014 forecast earnings, its share price would fall by 37% to 637p. That’s too much of a risk for me, I’m afraid.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Roland does not own shares in ARM Holdings.

More on Investing Articles

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

With £1,000 to invest, should I buy growth stocks or income shares?

Dividend shares are a great source of passive income, but how close to retirement, should investors think about shifting away…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Warren Buffett should buy this flagging FTSE 100 firm!

After giving $50bn to charity, Warren Buffett still has a $132bn fortune. Also, his company has $168bn to spend, so…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing For Beginners

I wish I’d known about this lucrative style of stock market investing 20 years ago

Research has shown that over the long term, this style of investing can generate returns in excess of those provided…

Read more »

Woman using laptop and working from home
Investing Articles

Is this growing UK fintech one of the best shares to buy now?

With revenues growing at 24% and income growing at 36%, Wise looks like one of the best shares to buy…

Read more »

Dividend Shares

Are Aviva shares one of the UK’s best investments today?

UK investors have been piling into Aviva shares recently. However, Edward Sheldon's wondering if he could get bigger returns elsewhere.

Read more »

Older couple walking in park
Investing Articles

10.2% dividend yield! 2 value shares to consider for a £1,530 passive income

Royston Wild explains why investing in these value shares could provide investors with significant passive income for years to come.

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

Nvidia and a FTSE 100 fund own a 10% stake in this $8 artificial intelligence (AI) stock

Ben McPoland explores Recursion Pharmaceuticals (NASDAQ:RXRX), an up-and-coming AI firm held by Cathie Wood, Nvidia and one FTSE 100 trust.

Read more »

Electric cars charging in station
Investing Articles

Is NIO stock poised for a great rebound?

NIO stock has risen 24.5% over the past month, coming off its lows following a solid month of vehicle deliveries.…

Read more »