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At What Price Would ARM Holdings plc Be A Bargain Buy?

ARM HoldingsPatience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.

Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.

Today, I’m going to tell you why I believe ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) is currently in the bargain basement.

A FTSE 100 growth company

ARM Holdings is Britain’s tech giant, valued at £12bn at a current share price of 857p. The company, which licenses and receives royalties on fast, power-efficient, low-cost microprocessor designs, has been at the heart of the smartphone revolution.

Earnings have increased at a compound annual growth rate of 23% over the last three years and analysts see an increase of the same order for 2015. The table below shows some data on share prices and trailing 12-month P/Es (based on diluted earnings per share) across the three-year period.

Period Share price range (p) Share price average (p) P/E range P/E average
22/7/14 – 9/10/14 841 – 986 913 39.2 – 46.0 42.6
23/4/14 – 21/7/14 834 – 960 890 39.9 – 46.0 42.6
4/2/14 – 22/4/14 875 – 1,047 971 42.5 – 50.8 47.1
22/10/13 – 3/2/14 924 – 1,110 1,001 47.7 – 57.3 51.7
24/7/13 – 21/10/13 846 – 1,039 931 47.1 – 57.8 51.8
23/4/13 – 23/7/13 759 – 1,097 931 45.6 – 65.9 55.9
5/2/13 – 22/4/13 866 – 971 917 58.9 – 66.1 62.4
23/10/12 – 4/2/13 640 – 893 771 45.7 – 63.8 55.1
25/7/12 – 22/10/12 527 – 599 573 38.5 – 43.8 41.9
24/4/12 – 24/7/12 469 – 537 500 35.9 – 41.1 38.2
31/1/12 – 23/4/12 536 – 611 582 43.1 – 49.1 46.7
25/10/11 – 30/1/12 548 – 645 589 47.0 – 55.4 50.6

As you can see, the P/E rating has been coming down since a peak of over 60 about 18 months ago. Lately, we’re back to a P/E level not see for two years.

Furthermore, ARM has no debt, and the cash on the balance sheet has increased 50% over the two years from £496m to £746m, making today’s P/E even more attractive.

At what price a bargain?

I reckon if you can pick ARM’s shares up on a P/E of under 40 (and just to remind you, I’m talking about a trailing 12-month P/E), you’re getting a pretty good bargain for a high-growth tech company.

With ARM’s current trailing 12-month earnings per share standing at 21.43p, a P/E of 40 equates to just about bang on the current share price of 857p. So, I have ARM in the bargain basement — at the top end — as things stand.

As well as high-profile ARM, I believe there are a number of below-the-radar growth shares in the market today for investors seeking exceptional returns.

Indeed, the Motley Fool's top smaller-companies analyst has recently unearthed one outstanding opportunity that is available at a discount share price right now.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.