The market expects great things from these companies. So should the shares be bought?
The stock market is a place for buyers and sellers to come together. The prices shares trade at are neither right or wrong, they simply balance the supply and demand.
When investors have high expectations for a company's prospects, they will bid the shares up to a high rating. To get an approximation of which companies investors have the highest hopes for, I've sought out the 12 companies in the FTSE 100 (UKX) with the highest forward price-to-earnings (P/E) ratio. These are the companies whose market capitalisation has grown furthest from their expected profits. In that sense, they are the most expensive blue chips on the market today.
I have used the rolling one-year P/E to smooth out difference between companies that currently in different stages of their financial year.
|Company||Price (p)||P/E rolling one-year||Yield (forecast, %)||Market cap (£m)|
|ARM Holdings (LSE: ARM)||666||39.5||0.6||9,191|
|Tullow Oil (LSE: TLW)||1,403||26.7||0.8||12,734|
|Hargreaves Lansdown (LSE: HL)||737||24.1||3.5||3,493|
|Fresnillo (LSE: FRES)||1,890||23.0||1.8||13,551|
|Hammerson (LSE: HMSO)||472||22.9||3.7||3,366|
|Land Securities (LSE: LAND)||807||22.0||3.7||6,291|
|Capital Shopping Centres (LSE: CSCG)||333||20.3||4.5||2,883|
|Intertek (LSE: ITRK)||2,804||19.6||1.4||4,508|
|International Consolidated Airlines (LSE: IAG)||157||19.4||0.0||2,918|
|Experian (LSE: EXPN)||1,072||18.8||2.0||10,823|
|Aggreko (LSE: AGK)||2,047||18.4||1.2||5,492|
|British Land (LSE: BLND)||531||17.5||5.0||4,725|
Data from Stockopedia
I picked out four companies as particularly interesting.
1) ARM Holdings
Computer chip designer ARM is one of the UK's few world-class high-tech businesses. Its processors are designed specifically to be small and with low power requirements. For over 10 years, ARM has dominated the market in processors for mobile phones.
In 2001, ARM delivered pre-tax profit of £13.8m on annual sales of £40.8m. Fast-forward 10 years and ARM made £230m of pre-tax profit on sales of £492m. In a decade, the business has 10-bagged.
ARM first paid shareholders a dividend in 2003, a maiden payment was 0.6p per share. The 2012 payout is expected to hit 4.0p.
After rising more than 10% following recent Q3 results, ARM now trades on a forward P/E of 46.8 times earnings per share (eps) forecasts for 2012.
It is worth noting that ARM has been highly rated previously. In late 2007, the shares were priced at 43.6 times 2006 earnings and 55 times the outcome for the full year. That high valuation did not stop the shares going on to increase fourfold in the five years that followed.
Aggreko is the world's leading power-generation and temperature control equipment rental company.
Aggreko was exclusive supplier of temporary power for the London Olympics. The company thrives on customers requiring power in areas lacking infrastructure. The natural resources sector is a big market for the company.
The company's success in recent years has propelled it into the FTSE 100 index. In the last five years, the share price has increased more than threefold. In that time, the dividend has increased, on average, 24.5% per annum; eps has risen even faster, at an average rate of 36.9%.
At the half-year stage, Aggreko reported a 30% increase in eps and a 15% dividend hike. Some may think that the shares look expensive on 20.1 times forecast earnings for 2012. Growth is forecast to continue, however, bringing the P/E down to 18.0 times 2013 earnings.
That's not a huge premium to pay for a successful market leader.
3) Land Securities
There are some sectors in the market where the P/E ratio is less meaningful. Real estate is one.
Land Securities owns, manages and develops a number of large sites across the country. London properties include Piccadilly Lights and a development at 20 Fenchurch Street that has been nicknamed 'The Walkie Talkie'. Outside of London, Land Securities' portfolio includes shopping centres such as Cabot Circus in Bristol and Leeds' White Rose.
Investors in Land Securities usually look most closely at the company's net asset value (NAV). With the annual results in May, this was reported at 921p per share. That was a 4.1% increase on the previous year. Since 2009, Land Securities' NAV has increased 44%.
At today's price, the shares trade at a discount of 14% to the company's most important fundamental statistic.
Dividends are around 60% of the payout prior to the financial crisis, leaving plenty of scope for increases as the economy recovers.
Intertek specialises in product and component testing. This gives the company exposure to a broad range of customers and industries. The result is a business that is much less reliant on a single particular part of the economy than most listed companies.
Like ARM and Aggreko, Intertek has grown fast. In the last five years, dividends at the company have been increased year-on-year at an average rate of 17.9% per annum. By the same measure, eps has been increasing by 17.6% every year.
In fact, Intertek has been growing dividends since the company started paying in 2002. Since then, the payout has increased more than fivefold.
Expectations are that growth at the company will be even higher in 2012. Analysts expect a 39.8% increase in eps for 2012, accompanied by a 20.1% dividend hike. Growth is expected to slow slightly the year after, meaning that the shares trade on a 2013 P/E of 19.2.
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> David does not own shares in any of the above companies. The Motley Fool owns shares in Hargreaves Lansdown.