Why I’d Buy ARM Holdings plc And BHP Billiton plc Today

Is ARM Holdings (LSE: ARM) still a buy after rising 10% in early trade this morning? I think so.

The chip designer issued a third-quarter update today, revealing a 24% rise in Q3 sales and a 27% increase in pre-tax profits for the period.

In total, 3.6 billion ARM-based chips were shipped during the quarter, a 20% increase on the same period last year. The firm continues to have success in attracting new customers for its designs, and signed 38 processor licences during the last quarter.

ARM isn’t sacrificing profits to grow sales, either. The firm’s operating margin rose to 52% during the first nine months of this year, up from 50% for the same period last year.

What about the valuation?

ARM shares have actually underperformed the FTSE 100 slightly over the last six months, falling by 13% compared to the FTSE’s 10%.

This is good news for new buyers, as while the share price has been falling, ARM’s sales, profits and volumes have been rising.

ARM’s other big strength is that its focus on licensing its intellectual property to chip manufacturers means that capital expenditure is limited. Unlike peers such as Intel, ARM will never have to take on the risk and cost of a new factory in order to maintain growth.

ARM shares currently trade on a 2014 P/E of 53, but a 2015 forecast P/E of 32. Although that’s still quite pricey, I find it reassuring that the market is gradually allowing ARM shares to re-rate onto a more sustainable valuation. The shares remain a buy, in my opinion.

BHP Billiton

Shares in mining giant BHP Billiton (LSE: BLT) didn’t follow those of ARM upwards this morning, despite BHP releasing a very solid operational update.

In short, BHP is doing it exactly what it promised. Expansion of profitable, low-cost iron ore production is being prioritised. Iron ore output rose by 7% during the most recent quarter.

At the same time, oil and gas output fell by 4% to 65 million barrels of oil equivalent. This was mainly because BLT is deferring new US onshore gas development in the face of weak prices, which seems sensible.

Is BHP a buy?

BHP shares have fallen by 21% so far this year. Although BHP’s shares trade on only 10 times last year’s earnings, they boast a chunky forecast P/E of 25.

Expected dividend cover for the current year has fallen to just 0.54. BHP’s 7.5% forecast dividend yield suggests a dividend cut could be likely, but I’m not sure.

BHP has a long tradition of maintaining its dividend payment through downturns. It does have the financial strength to do so, if it chooses. I don’t think a cut is likely this year, unless market conditions get even worse.

Despite this risk, at less than 1,100p, I rate BHP as a strong long-term buy. Even a 30% dividend cut would still leave the shares with a yield of 5%. I don’t see any reason to be concerned, as long as you are prepared to ride out the storm and wait for prices to rise.

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Roland Head owns shares of BHP Billiton. 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.