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Why ARM Holdings plc Provides Terrible Shareholder Value

ARM HoldingsIn this article I am describing why ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) could be considered poor value for money.

Price to Earnings (P/E) Ratio

Microchip builder ARM Holdings has punched stratospheric earnings growth in recent years, as demand for smartphones and tablet PCs has driven revenues through the roof. The Cambridge firm has emerged as a key supplier to manufacturing giants including Samsung and Apple, a position which analysts expect to continue pushing earnings higher in the medium term at least.

Still, based on these forecasts ARM Holdings changes hands on a P/E multiple of 38.8 for 2014, a rating which drops to 31.5 for next year. These readings fall well short of the fair value benchmark of 15 or below, while the company also trades at a premium to a forward average of 17 for the complete FTSE 100.

Price to Earnings to Growth (PEG) Ratio

Fears of market saturation in mobile device markets is expected to result in lower earnings growth in 2014 compared with those of the past few years, and ARM Holdings is predicted to punch a 14% rise in the current 12-month period. Earnings expansion is expected to rise 24% next year.

Although more modest on a historical basis these growth figures are still impressive. But a PEG rating of 2.7 for this year underlines the firm’s failure to provide decent value — any figure around 1 represents a reasonable price value relative to growth prospects — although a drop to 1.4 in 2015 signifies a definite improvement.

Market to Book Ratio

After subtracting total liabilities from total assets, ARM Holdings carries a book value of £1.31bn, in turn creating a book value per share of £1.40. Based on these figures the tech giant carries a market to book rating of 1 — this reading is smack bang on the textbook value watermark.

Dividend Yield

ARM Holdings’ stunning earnings performance has enabled it to reliably grow the full-year dividend in recent years. And City analysts expect this momentum to continue, with 2013’s 5.7p per share payment predicted to advance to 6.9p this year and to 8.5p in 2015.

Still, investors should be aware that the firm’s focus on dedicating its vast capital pile to research and development — as well as acquisition activity — overrules its prerogative to deliver bumper shareholder payouts. Indeed, yields for this year and next come in at a miserly 0.8% and 1% correspondingly, comfortably below the current 3.2% FTSE 100 forward average.

A Poor Value Stock Pick

In my opinion ARM Holdings falls woefully short of being considered a fairly-priced stock for those seeking either earnings or dividend growth. Although the company deals on a cheap market to book ratio I believe that this reflects eroding phone and tablet demand which looks set to hamper sales of ARM Holdings’ high-tech components.

And like all stocks dealing on elevated P/E multiples, I believe that ARM Holdings is a risk of a serious share price collapse should bearish earnings projections materialise. I believe that better priced and less hazardous stocks can be found elsewhere.

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Royston does not own shares in any of the companies mentioned in this article.