A total of £2.2bn was added to the combined market value of ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) and Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US) when markets opened this morning, after both firms revealed better-than-expected full-year sales growth.
ARM signs new deals
A record number of new licencing deals helped ARM’s revenues to rise by 19% during the fourth quarter of 2014, contributing to a 16% increase in full-year revenues, which rose from $1,117.7m to $1,292.6m.
Down at the bottom line, ARM reported a 17% increase in full-year normalised earnings per share, which rose to 24.1p, beating consensus forecasts for 23.6p per share.
ARM’s earnings per share have risen by an average of 45% per year since 2009 — stunning growth that suggests the firm may eventually be able to grow into its £14bn market cap, which gives the shares a trailing P/E of 45.
The dividend rose, too: in recognition of ARM’s strong free cash flow, the full-year payout was increased by 23% to 7.02p.
For several years, ARM shares have looked overvalued to me, but the firm’s share price performance has suggested I’m wrong. For me, buying shares with a P/E of 45 and a yield of less than 1% is too risky — but for now at least, the market strongly disagrees with my view.
Reckitt targets margins
At consumer goods group Reckitt Benckiser, like-for-like sales rose by 4% last year, while post-tax profits — excluding the Reckitt’s demerged pharmaceutical business — rose by a healthy 14%.
Reckitt’s operating margin rise by 1.6% to 24.7%, and today the firm announced Project Supercharge, a £200m cost-saving programme that aims to lock in last year’s margin gains, and make them sustainable.
However, despite strong profit growth, Reckitt only announced a 1% increase in the full-year dividend, which will rise to 139p. The reason for this appears to be the firm’s dividend policy, which is to pay out 50% of post-tax earnings.
The demerger of Reckitt’s pharmaceutical business means that earnings per share have fallen: maintaining the current dividend and the firm’s 50% payout policy will require adjusted earnings per share to rise by 20% during 2015, which could be tall order.
Yesterday, I wrote that Reckitt was now too expensive for me — to be honest, today’s results don’t change that view. It’s a great business with strong profit margins, but I think that this is already reflected in the share price.