Chip-designer ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) has seen its share price drop by around 8% over the past 12 months, to 835p today, even though we have double-digit earnings growth forecast for this year and next.
The City is expecting to see a 13% gain in earnings per share (EPS) for the year to December 2014, followed by a further 24% for next year — but how realistic will that be? We’ll get some clue on 22 July, when ARM is scheduled to release first-half figures.
Good first quarter
Q1 numbers released in April looked promising, with revenues up 16% in dollar terms over the same quarter a year previously — though only up 10% in sterling terms. Of that, processor licensing had gained 38% (again in US dollars).
Adjusted pre-tax profit was reported to be up 9%, with EPS up 5%. That’s not quite enough to make the 13% forecasts, but the full year will depend on new licenses and on royalties from chip sales. And on that front, things are looking pretty good.
During the first three months, ARM saw 26 new processor licences signed, and it wasn’t just for mobile computing applications — the firm’s enterprise networking offerings are drawing in the customers too. A very healthy 2.9 billion ARM-based chips were shipped in the period, and that’s a staggering number.
Rest of the year
Looking forward, the company told us that “ARM’s pipeline of licensing opportunities remains healthy for Q2 and the rest of the year“, saying that the outlook for the semiconductor industry is expected to strengthen in the second half.
With demand hopefully rising as economies recover, do ARM’s shares look good value right now?
Well, forecasts suggest a forward P/E ratio for this year of 35, falling to 29 next — and that’s more than twice the FTSE 100’s long-term average of around 14. Too high? Not necessarily, because ARM is far from the kind of mature low-growth company that makes up the bulk of London’s top index.
Relatively low P/E
In fact, ARM ended last year in a P/E of nearly 53, and we haven’t seen a year-end multiple below 45 since 2009. Based on history and on long-term growth expectations, ARM shares are looking better value now than they have been in years.
Whether that’s sufficiently good value to buy is for you to decide, but the City’s analysts are heavily on the Buy side of the equation — and this week’s interim should help us decide.