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Can ARM Holdings Outperform Intel?

LONDON -- If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100, FTSE 250, and the U.S. stock market.

I'm going to use three key criteria -- value, income, and growth -- to compare companies to their sector peers. I've included some U.S. shares, as these provide U.K. investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.

Today, I'm going to take a look at ARM Holdings  (LSE: ARM.L  ) (Nasdaq: ARMH  ) and Intel (Nasdaq: INTC  ) . The popular perception of these two companies is that they serve different markets -- smartphones and tablets (ARM) and PCs and servers (Intel) -- but in fact, ARM is trying hard to get into the PC and server market, while Intel is headed in the opposite direction, while defending its traditional strengths. Make no mistake -- these two companies are competing very hard.

Data is sourced from Morningstar, Reuters, and company reports.

1. Value
The easiest way to lose money on shares is to pay too much for them -- so which share looks better value, ARM, or Intel?

Value

ARM Holdings

Intel

Current price-to-earnings ratio 68.1 8.7
Forecast P/E 51.2 9.3
Price-to-book ratio 9.0 2.0
Price-to-sales ratio 18.5 1.8

On a value basis, there's no competition; Intel wins by a massive margin. Its shares are much cheaper when compared to revenue, earnings and asset value. ARM is definitely not a value investment, whereas anyone interested in purchasing a big name that's going cheap -- as Warren Buffett famously likes to do -- might want to take a closer look at Intel. Of course, there's always the risk that Intel will get cheaper; its pre-tax profits are expected to decline over the next two years, whereas ARM is expected to deliver further growth.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do ARM and Intel compare in terms of income?

Value

ARM Holdings

Intel

Current dividend yield 0.5% 4.5%
5-year average historical yield 0.9% 2.8%
5-year dividend growth rate 28.3% 14.4%
Forecast yield 0.6% 4.4%

Intel's depressed price has given rise to an attractive 4.5% dividend yield that's twice the 2.2% average for S&P 500 companies. This yield is expected to remain virtually unchanged next year and could provide the basis for an attractive income stream while Intel attempts to turn around its fortunes. ARM's dividend income is pretty paltry by comparison, at just 0.5%.

However, ARM's massive 478 million pounds cash pile (which equates to 35 pence per share) has led the company to consider other ways of returning cash to shareholders. Tim Score, ARM's chief financial officer, recently told Reuters that the company's payout ratio -- the proportion of earnings per share paid to shareholders as dividends -- is likely to rise toward 50% or even more. Even so, at current share prices ARM's dividend would have to rise by ten times before it provided a yield equal to Intel's attractive payout.

3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.

How do ARM and Intel shape up in terms of growth?

Value

ARM Holdings

Intel

5-year EPS growth rate 19% 22.8%
5-year revenue growth rate 13.3% 8.8%
5-year share price return 554% (21%)

The growth statistics provide an interesting picture. Despite its high yield and low P/E ratio, Intel has delivered decent growth over the last five years -- although shareholders have seen a capital loss. However, Intel's sales were down 5.5% in the last quarter compared to the same period a year ago, and there is no doubt the company is struggling to deal with the consumer trend to buy tablets and smartphones rather than laptops. ARM, on the other hand, has been one of the biggest beneficiaries of the boom in tablets and smartphones, many of which use its chip designs.

ARM's share price growth over the last five years has been nothing short of stellar and analysts are forecasting strong growth over the next two years. Intel's forecasts, on the other hand, look pretty downbeat, with consensus forecasts suggesting that earnings will fall by around 6.7% in the current year and 4.5% in 2013. Growth investing is all about momentum, and right now, ARM has it, and Intel doesn't.

Should you buy ARM or Intel?
Both of these shares have the potential to be a good investment, but which will suit you depends on whether you are looking for value, income, or growth.

At its current price, I believe that ARM Holdings is suitable for dedicated growth investors only -- and I have some concerns that the best of the growth may already have happened. However, ARM's momentum is impressive and its core smartphone and tablet market is likely to continue expanding for another year or two yet. It could also have success moving into the Intel-dominated PC and server market -- but the barriers to entry here are high, as most PC and server software won't run on ARM processors without being rewritten.

On the other hand, Intel looks like an increasingly attractive value and income play to me. Although it may be suffering from the popularity of smartphones and tablets, it is starting to make headway in this area and remains the dominant player in the server and PC market. The main attraction of ARM's processors is their low power consumption, and Intel is working hard to match this performance while defending its incumbent position. It's also worth noting that Intel owns a 15% stake in FTSE 250-listed Imagination Technologies, a direct competitor to ARM that recently strengthened its product portfolio with the acquisition of U.S. chip firm MIPS Technologies. Imagination would be a manageable acquisition for Intel and could potentially accelerate its penetration of the lucrative mobile computing market.

Warren Buffett's U.K. buy
Billionaire investor Warren Buffett has previously owned shares in Intel, but more recently he invested almost $1 billion in one of the UK's best-known blue chip brands -- a FTSE 100 giant in which he now has a 5% stake.

If you'd like to know which U.K. company tempted the legendary investor to make a rare investment outside the U.S., then this free Motley Fool report has all the details. What's more, you may still be able to buy the shares Buffett bought at the price he paid! Indeed, the company in question has increased its dividend every year for 28 years and currently offers a yield of nearly 5% -- potentially making the share a very attractive long-term investment for income-seekers.

I think Warren Buffett's latest U.K. buy is a very appealing investment -- in fact, I own shares in the company myself. So, I'd strongly recommend you click here to download this Buffett report now, while it remains free and available.

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Roland Head does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of Intel. Motley Fool newsletter services have recommended writing puts on Intel. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that
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Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 28, 2012, at 2:07 PM, pondee619 wrote:

    "ARM's massive 478 million pounds cash pile (which equates to 35 pence per share) has led the company to consider other ways of returning cash to shareholders"

    According to Yahoo finance

    ARMH cash $710Million=1.55/share

    INTC cash $10.5 Billion=2.11/share. When comparing companies it is almost fradulent to point to an aspect of one company without referencing that aspect as it relates to the other.

    Current Pay out ratio:

    ARMH=30%

    INTC=37% about equal, both appear sustainable as is. INTC is appreciably higher, as you stated.

    "ARM's share price growth over the last five years has been nothing short of stellar " Yes, ARMH share price has outpaced its earning growth by a factor of 29X. How long could we expect this to continue? It's "stellar" share price growth has led to a PE ratio 8 times greater that of INTC.

    AMRH PEG=3.5

    INTC PEG=0.4

    Other than stock price momentum, what does ARMH have going for it over INTC?

  • Report this Comment On November 28, 2012, at 10:09 PM, H3D wrote:

    "Can ARM Holdings Outperform Intel?"

    Over the last 2 years ARM is up 92% and Intel us down 8%

    So yes. Clearly it can.

  • Report this Comment On November 29, 2012, at 9:00 AM, pondee619 wrote:

    Clearly it DID.

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