Should You Buy ARM Holdings plc On Forecast Weakness?

In these days when growth investing is under the cosh and stocks like Quindell and Blinkx are rapidly acquiring pariah status, it’s reassuring to know that we still have some great growth companies around.

One of those is ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US), the Cambridge-based chip designer that has taken the world of mobile processing by storm over the past decade and has rewarded investors with a 12-bagger over the same period.

Shares slipping back

But ARM shares are down 18% since the start of 2014, to 900p today, so are we looking at a nice buying opportunity now?

Over the past 12 months, the City’s analysts have been cutting back their forecasts for ARM for this year and next, so the slightly bearish outlook towards ARM shares might seem justified. But I reckon it’s only a minor blip in a much longer-term growth story — and forecasters have already started to return to a bullish stance in the past month.

A year ago, the consensus earnings per share (EPS) forecast for the year ending December 2014 was for 25.3p, for a 21% rise on 2013’s 20.9p per share, but that slowly fell until three months ago the brokers were expecting just 23.1p. Over a similar period, predictions for 2015 saw EPS falling from 29.4p to just 28.3p.

The story is similar with dividends. ARM might not be seen as much of a dividend stock, but it has been steadily increasing the annual cash it pays to its shareholders at a pace that easily outstrips inflation. A year ago we were looking at an expected 6.6p per share for 2014, but that’s dropped a little to 6.5p today, and over the past six months the 2015 dividend forecast has slipped from 8.5p to 8.3p.

Bullishness is returning

But those predicted dividends would represent annual rises of 14% and 27% respectively, and at the current share price we’d see yields of 0.7% and 0.9% respectively. Those aren’t great yields right now, but they’re massively covered by earnings, and dividends growing at that rate should mount up to a very respectable yield long before ARM’s growth really starts to slow. In fact, if ARM’s P/E were to be dropped from the current 38 to the index average of 14, we’d be looking at yields of 2-3% already.

And earnings forecasts have already started to strengthen again. In the past three months, predicted 2014 EPS has firmed up to 23.7p from that 23.1p, and to 29.2p from 28.3p for 2015.

On top of that, there’s a pretty big Strong Buy consensus among analysts right now, and I really can’t disagree with them — I see the current dip as a good opportunity to consider buying ARM shares.

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Alan Oscroft 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.