Is Now the Time to Buy ARM Holdings?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at ARM Holdings (LSE: ARM  ) (NASDAQ: ARMH  ) to determine whether you should consider buying the shares at 738 pence.

I am assessing each company on several ratios:

Price/Earnings, or P/E: Does the share look good value when compared against its competitors?

Price/Earnings to Growth, or PEG: Does the share look good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

Price

3-Year EPS Growth

Projected P/E

PEG

Yield

3-Year Dividend Growth

Dividend Cover

738 pence

127%

52

3.3

0.5%

40%

3.5

The consensus analyst estimate for next year's earnings per share is 14.4 pence (16 % growth) and dividend per share is 4 pence (14% growth).

Trading on a projected P/E of 52, ARM appears slightly more expensive than its peers in the technology hardware and equipment sector, which are currently trading on an average P/E of around 49. ARM's P/E and double-digit growth rate give a PEG ratio of around 3.3, which implies the share price is very expensive for the near-term earnings growth the firm is expected to produce.

Offering a 0.5% yield, the dividend is about half of the technology hardware and equipment sector average. However, ARM has a three-year compounded dividend growth rate of 40%, implying the payout could soon catch up to that of its peers.

Indeed, the dividend is three-times covered, giving ARM plenty room for further payout growth. ARM is focused on a progressive dividend policy, with this year's interim dividend up 20% from last year.

ARM looks expensive. Are the shares it worth it?
I do not like buying expensive technology stocks and ARM seems to be one of these. Although ARM is trading below the sector average P/E ratio, its PEG ratio is sky-high, leading me to believe the stock is overpriced.

Anyway, so far this year ARM has seen strong growth. The company's third-quarter results showed group revenue up 20% and profits up 22%. The revenue growth was largely driven through processor royalty sales, which advanced 27% over the year.

I believe ARM has hedged its bets, with the company designing processing units for all of the major smart-phone manufacturers. This diversification has given the company multiple income streams, protecting it from the loss of a single contract.

However, ARM could be facing increasing competition in the future as Intel continues to attack ARM's market share. I believe there is also speculation about a takeover of ARM -- historically this has been a prospect but many analysts now doubt this due to ARM's high valuation.

Although most analysts are bullish on ARM, I believe the high valuation leaves little room for disappointment and even a slight slowdown in revenue growth could be very painful for the stock. So overall, based on the high valuation and low yield, I believe now does not look to be a good time to buy ARM Holdings at 738 pence.

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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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  • Report this Comment On December 27, 2012, at 10:30 AM, pondee619 wrote:

    "Trading on a projected P/E of 52, ARM appears slightly more expensive than its peers in the technology hardware and equipment sector which are currently trading on an average P/E of around 49"

    "Although ARM is trading below the sector average P/E ratio"

    Is ARM above the average P/E ration for the sector nor not?!

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