Anyone who cast their eye down the list of FTSE 100 companies five years ago and decided to invest in ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US), London Stock Exchange Group (LSE: LSE) and Whitbread (LSE: WTB) would today be sitting on the index’s biggest winners.
The three companies’ shares have soared 341%, 293% and 275%, respectively. Meanwhile, the Footsie has climbed just 31%.
Can investors today expect a similar stunning outperformance from ARM, London Stock Exchange and Whitbread in the next five years? You may be surprised by my answer — at least in the case of one of the companies.
ARM is a British technology success-story, and global leader in energy-efficient chip design. Chips based on ARM’s technology drive billions of products around the world; the company’s partners are currently shipping 3.5 billion every quarter.
ARM’s shares trade at 45.6 times last year’s earnings, as I write, and you may think such a high P/E is unpromising, even if the company is expected to increase earnings by 74% this year. But here’s the thing: this time five years ago, ARM was on a near identical P/E — 45.7 — and delivered a 71% increase in earnings in 2010.
So, despite its shares having risen by 341%, ARM’s valuation hasn’t changed at all — the shares have simply risen in line with the growth of the company’s earnings. Put another way, investors buying ARM’s shares today are paying the same earnings multiple (with virtually the same near-term earnings growth prospects) that delivered a 341% return for investors five years ago.
As such, and because the so-called “Internet of Things” could be a great driver for ARM’s continuing growth, it would be no surprise to me to see this tech champion deliver another stunning five-year return for investors.
London Stock Exchange
The rise in the share price of London Stock Exchange (LSE) over the last five years has been rather different to that of ARM. Back in 2010, the world was still wary of financial stocks, reflected in LSE’s lowly P/E of 10.3 at that time.
The company increased its earnings by 23% in 2010, and has grown earnings every year since. However, the main driver for the 293% rise in the shares has been the market’s willingness to value the company’s earnings much more highly than in the aftermath of the financial crisis. While the P/E was 10.3 five years ago, today it stands at 24.3.
LSE has a strong franchise and prospects of decent earnings growth — 12% is forecast for this year. However, I can’t see a further expansion of the P/E to the same dramatic degree as over the last five years. And, in the absence of such a turbo-charger, LSE’s earnings growth alone would be insufficient to deliver a repeat 293% five-year rise in the shares.
The shares of Whitbread — the owner of Premier Inn, Costa coffee and other hospitality brands — have also enjoyed a re-rating, although not on the scale of that seen by LSE.
This time five years ago, Whitbread traded on a P/E of 14.6 and went on to increase its earnings by 20% that year. Today, we’re looking at a P/E of 24.7 with a forecast 14% increase in earnings. So, although Whitbread was on a higher earnings multiple than LSE five years ago (and thus earnings growth has played a bigger part in the 275% rise in its shares), both companies now command a similar rating and appear to have similar prospects for earnings growth.
As such, I’d say Whitbread — like LSE — may be able to deliver a reasonable share performance in the next five years, but is unlikely to repeat the rip-roaring return of the last five. ARM is my pick for a repeat performance.