Reckitt Benckiser Group Plc & ARM Holdings plc Power Ahead As Sales Beat Expectations

Should you buy Reckitt Benckiser Group Plc (LON:RB) or ARM Holdings plc (LON:ARM) after today’s results?

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A total of £2.2bn was added to the combined market value of ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) and Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US) when markets opened this morning, after both firms revealed better-than-expected full-year sales growth.

ARM signs new deals

A record number of new licencing deals helped ARM’s revenues to rise by 19% during the fourth quarter of 2014, contributing to a 16% increase in full-year revenues, which rose from $1,117.7m to $1,292.6m.

Down at the bottom line, ARM reported a 17% increase in full-year normalised earnings per share, which rose to 24.1p, beating consensus forecasts for 23.6p per share.

ARM’s earnings per share have risen by an average of 45% per year since 2009 — stunning growth that suggests the firm may eventually be able to grow into its £14bn market cap, which gives the shares a trailing P/E of 45.

The dividend rose, too: in recognition of ARM’s strong free cash flow, the full-year payout was increased by 23% to 7.02p.

For several years, ARM shares have looked overvalued to me, but the firm’s share price performance has suggested I’m wrong. For me, buying shares with a P/E of 45 and a yield of less than 1% is too risky — but for now at least, the market strongly disagrees with my view.

Reckitt targets margins

At consumer goods group Reckitt Benckiser, like-for-like sales rose by 4% last year, while post-tax profits — excluding the Reckitt’s demerged pharmaceutical business — rose by a healthy 14%.

Reckitt’s operating margin rise by 1.6% to 24.7%, and today the firm announced Project Supercharge, a £200m cost-saving programme that aims to lock in last year’s margin gains, and make them sustainable.

However, despite strong profit growth, Reckitt only announced a 1% increase in the full-year dividend, which will rise to 139p. The reason for this appears to be the firm’s dividend policy, which is to pay out 50% of post-tax earnings.

The demerger of Reckitt’s pharmaceutical business means that earnings per share have fallen: maintaining the current dividend and the firm’s 50% payout policy will require adjusted earnings per share to rise by 20% during 2015, which could be tall order.

Yesterday, I wrote that Reckitt was now too expensive for me — to be honest, today’s results don’t change that view. It’s a great business with strong profit margins, but I think that this is already reflected in the share price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head 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.

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