Prior to the recent spike in ARM’s (LSE: ARM) (NASDAQ: ARMH.US) share price, it had been a highly disappointing year for the UK-based technology company. Indeed, even after its shares rose by over 6% this week following a strong update from the company, they are still down almost 20% during 2014. This does not compare favourably to the FTSE 100, which is up around 1% since the turn of the year.
However, ARM still has a vast amount of potential and could prove to be an attractive long term investment. Here’s why.
Vast Growth Potential
There are very few companies that can compete with ARM when it comes to earnings growth. Indeed, a quick glance at the company’s recent history of growth shows that it has not only been strong, it has also been very stable. For instance, ARM has been able to increase earnings per share (EPS) in each of the last four years, with it averaging 41% per annum and ranging between 18% and 71% per annum. This stability is a big plus for investors, since ARM seems better able to weather macroeconomic difficulties than many of its technology peers, which have delivered a more volatile earnings profile in recent years.
Furthermore, ARM’s future growth potential seems equally strong. For example, the company is forecast to increase the bottom line by 13% in the current year and by 24% next year. Beyond that, ARM looks set to continue its strong growth profile, with the company’s focus on intellectual property and ideas allowing it to be more nimble than manufacturing-focused peers. This could help ARM to keep pace with a fast-moving technology marketplace.
Valuations
Despite the fall in its share price during 2014, ARM still trades on a relatively high price to earnings (P/E) ratio of 37.5. However, when this is combined with its forecast growth rate for next year of 24% to give a price to earnings growth (PEG) ratio, it yields a figure of 1.6. While above the PEG ‘sweet spot’ of 1.0, ARM’s PEG ratio remains attractive. That’s because it offers investors a much more stable growth platform than many of its peers and, to a large extent, this stability means shares in the company trade at a premium to rivals and are likely to continue to do so.
With a strong track record of growth, attractive earnings forecasts and a nimble, ideas-based business model, ARM could have a great long term future. As such, it could make a positive contribution to your mortgage repayments.
