A Further 46% Growth From ARM Holdings plc!

The price of growth shares is very dependent on the strength of forecasts — one slip, and several years of growth can come crashing to a halt.

ARMSo is that why the ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) share price has stagnated over the past 12 months after a characteristically strong run?

Well, there’s a further 46% growth in ARM’s earnings per share (EPS) over two years currently being forecast by City analysts — and that is not bad news!

It would put the shares, currently changing hands for 965p, on a forward P/E of 32 based on December 2015 estimates — that valuation might seem high, but ARM has been valued far higher than that in the past and the shares have still gone on to better things.

A slow year

The problem is, there’s one year of relatively slow growth predicted for 2014, with an EPS rise of only 16% on the cards — and with ARM’s earnings having  grown at an average 40% per year for the past four years, just one such year can be enough to dump many fickle growth investors off the bandwagon.

There’s a further 26% forecast for 2015 (which compounds to that headline 46%), which is heading back in the right direction, but it still falls short of that terrific recent run.

Strong consensus

appleStill, the analysts do seem pretty confident, with the 2014 consensus having barely changed over the past year — 12 months ago we were seeing predictions of 24.4p, and now that’s dropped only a smidgen to 24.1p, with 2015 EPS forecasts steadying at around 30.3p. And the range of individual opinions is pretty tight.

Dividends are often overlooked at ARM, and it’s true that forecast yields of under 1% won’t sway many people’s decisions — but the annual payout has been steadily rising, and it will play an important part once growth does finally slow. On that score, we have rises of 20% and 24% forecast for 2014 and 2015 — and dividend growth so far ahead of inflation will make a difference for those investing for 20 years or more.

As for recommendations, we have 20 out of 36 analysts urging us to buy ARM shares, with only a lonely three of them telling us we should sell — and that’s the most bullish I’ve seen them for a while.

Should you buy ARM?

I’m generally critical of the high valuations afforded to growth shares, but I’m siding with the analysts on this one. It would only take a doubling of forecast 2015 earnings to get ARM’s forward P/E down to an average 16. At a relatively modest EPS growth of 20% per year, it would be surpassed in just four more years — and that is really not a challenging horizon.

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Alan does not own any shares in ARM Holdings.