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ARM Holdings plc Soars To 52-Week High

Towards the end of 2014 it looked like the shine was starting to dull on the ARM Holdings (LSE: ARM)(NASDAQ: ARMH.US) growth story. By late October the share price was down 27% from its peak of 1,112p on 23 December, to just 806p.

Some people will have thought the fall inevitable, after ARM shares finished 2013 on a trailing P/E of nearly 53 — around 3.8 times the FTSE 100‘s long-term average of 14. It is, after all, what usually happens when a growth darling’s annual rises in earnings per share (EPS) start to slow down. And after a 40% climb in 2013 ARM’s forecast EPS for 2014 was dropping — even now, getting close to its expected full-year results day on 11 February, there’s only a modest 14% growth expected.

Growth picking up

But beyond that, forecast growth is picking up again, with rises of 23% and 20% currently penciled in for 2015 and 2016. And what’s more, there’s something that most commentators seem to miss — ARM’s dividend is still growing way ahead of inflation, with a forecast 28% rise for 2015 followed by another 24% in 2016. By the time ARM does start to go ex-growth, the dividend should be up to decent yields.

And the market now seems to have shaken off its ex-growth fears, and the shares have put on an impressive 31% since their October low to 1,054p today, and we’re not far away from that 2013 high again.

Forward P/E’s are looking less stratospheric too, coming down to 36 based on 2015 forecasts followed by 30 for 2016, and that seems a lot more reasonable assuming there really is a fair bit more growth to come. And there’s good reason to believe there is.

Strong Q3

At third-quarter time, reported in October, normalised year-to-date revenue was up 15% in dollars and 8% in sterling (with the different due to exchange rate movements), and EPS was up 11%. And what’s more, ARMs operating margin was growing — from 27.4% a year previously to 38.5%.

But more importantly than this year’s profits, during the quarter ARM signed 43 more processor licenses across its mobile computing, enterprise infrastructure and embedded intelligent devices markets, with improving per-chip royalty percentages. Total ARM-based chips shipped in the quarter topped 3 billion, for a 19% rise year-on-year.

Plenty to come

Assuming ARM’s growth does eventually slow and that P/E does fall, what growth would be needed to get it down to average on today’s share price? Well, earnings would only have to do a bit better than doubling to give us a P/E of 14, and at today’s expected 20% per year that would only take four years. Does ARM have that much growth in it still? I’d say that’s a big YES.

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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.