Is ARM Holdings plc A Super Growth Stock?

Shares in ARM (LSE: ARM) (NASDAQ: ARMH.US) have experienced a rather subdued year. Indeed, the UK-based technology company has seen its shares outperform the FTSE 100 — but only by a small amount, with ARM posting gains of 7% and the FTSE 100 up 3% in the last year. Does this mean that ARM has lost its appeal among investors as a top growth play? Or, is it still a super growth stock?

Strong Growth

Over the last four years, ARM has delivered staggering levels of earnings per share (EPS) growth. Indeed, it has averaged over 40% per annum growth in EPS over those four years, which suffice to say is above and beyond levels of growth that the vast majority of ARM’s FTSE 100 peers have managed over the same period.

Although this level of growth is not forecast for the next two years, ARM is still expected to post gains in EPS of 16% in 2014 and 25% in 2015. Both of these numbers are highly impressive and are still in excess of most FTSE 100 stocks. They show that ARM remains a company with exceptional amounts of growth potential.

Good Value?

However, does growth come at too high a price? ARM currently trades on a price to earnings (P/E) ratio of around 40, which is over three times higher than the FTSE 100’s P/E of 13.2, although ARM’s growth in earnings is forecast to be a lot higher than that of the FTSE 100. Perhaps the best way to compare them is to use the price to earnings growth (PEG) multiple, which combines the P/E ratio and forecast EPS growth rate.

appleFor ARM, the PEG ratio is 2 and for the FTSE 100 the PEG ratio is around 2.2 (assuming growth in earnings of 6% per annum over the next two years). Therefore, despite having an extremely high P/E ratio, ARM still appears to offer good relative value when its earnings growth forecasts are factored in, with a lower PEG ratio being more attractive.

Looking Ahead

As a result of having stunning growth prospects and a relatively attractive valuation, ARM still appears to be a super growth stock. While shares have been rather subdued over the last year, they could be all-set for a strong remainder of 2014.

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Peter does not own shares in ARM.