Should you buy ARM Holdings (LSE: ARM) today?
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 (UKX) 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.US) to determine whether you should consider buying the shares at 738p.
I am assessing each company on several ratios:
Price/Earnings (P/E): Does the share look good value when compared against its competitors?
Price Earnings Growth (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:
|Stock||Price||3-yr EPS growth||Projected P/E||PEG||Yield||3-yr dividend growth||Dividend cover|
The consensus analyst estimate for next year's earnings per share is 14.4p (16 % growth) and dividend per share is 4p (14% growth).
Trading on a projected P/E of 52, ARM appears slightly more expensive than its peers in the Technology Hardware & Equipment sector, who 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 & 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 the firm 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 738p.
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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
> Rupert does not own any share mentioned in this article.