Towards the end of 2014 it looked like the shine was starting to dull on the ARM Holdings (LSE: ARM)(NASDAQ: ARMH.US) growth story. By late October the share price was down 27% from its peak of 1,112p on 23 December, to just 806p.
Some people will have thought the fall inevitable, after ARM shares finished 2013 on a trailing P/E of nearly 53 — around 3.8 times the FTSE 100‘s long-term average of 14. It is, after all, what usually happens when a growth darling’s annual rises in earnings per share (EPS) start to slow down. And after a 40% climb in 2013 ARM’s forecast EPS for 2014 was dropping — even now, getting close to its expected full-year results day on 11 February, there’s only a modest 14% growth expected.
Growth picking up
But beyond that, forecast growth is picking up again, with rises of 23% and 20% currently penciled in for 2015 and 2016. And what’s more, there’s something that most commentators seem to miss — ARM’s dividend is still growing way ahead of inflation, with a forecast 28% rise for 2015 followed by another 24% in 2016. By the time ARM does start to go ex-growth, the dividend should be up to decent yields.
And the market now seems to have shaken off its ex-growth fears, and the shares have put on an impressive 31% since their October low to 1,054p today, and we’re not far away from that 2013 high again.
Forward P/E’s are looking less stratospheric too, coming down to 36 based on 2015 forecasts followed by 30 for 2016, and that seems a lot more reasonable assuming there really is a fair bit more growth to come. And there’s good reason to believe there is.
Strong Q3
At third-quarter time, reported in October, normalised year-to-date revenue was up 15% in dollars and 8% in sterling (with the different due to exchange rate movements), and EPS was up 11%. And what’s more, ARMs operating margin was growing — from 27.4% a year previously to 38.5%.
But more importantly than this year’s profits, during the quarter ARM signed 43 more processor licenses across its mobile computing, enterprise infrastructure and embedded intelligent devices markets, with improving per-chip royalty percentages. Total ARM-based chips shipped in the quarter topped 3 billion, for a 19% rise year-on-year.
Plenty to come
Assuming ARM’s growth does eventually slow and that P/E does fall, what growth would be needed to get it down to average on today’s share price? Well, earnings would only have to do a bit better than doubling to give us a P/E of 14, and at today’s expected 20% per year that would only take four years. Does ARM have that much growth in it still? I’d say that’s a big YES.