I’m always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market has been overheating.
So right now I’m analysing some of the most popular companies in the FTSE 100, hoping to establish if they can continue to outperform in today’s uncertain economy.
Today I’m looking at microchip designer ARM (LSE: ARM) (NASDAQ: ARMH.US) to determine whether the shares are still safe to buy at 830p.
So, how’s business going?
Over the last year or so, investors have been excited by ARM’s performance as the company’s profits surged higher, led by an ever-increasing demand for smaller, faster smartphones and devices.
Indeed, it would appear that this tech trend is not going to stop any time soon, as for the first quarter of this year, ARM reported a 31% year-on-year rise in pre-tax profit.
Having said that, some City analysts have started expressing concerns about the company’s ability to maintain the rapid rate of earnings growth, as sales at the firm’s largest customer, Apple are starting to slow.
In addition, analysts have raised concerns that the firm’s larger peer, Intel, is starting to muscle in on ARM’s dominance in the mobile processor market by offering technology of a similar nature.
Expected growth
Despite concerns about increasing competition in the sector and slowing sales at Apple, City analysts remain upbeat about ARM’s outlook.
City forecasts currently predict earnings of 21p per share for this year (40% growth) and 25p for 2014.
Shareholder returns
Unfortunately, ARM does not provide its shareholders with much in the way of cash returns and currently the company offers a dividend yield of only 0.6%.
Still, ARM’s management is committed to a progressive dividend policy and is expected to increase the payout 24% this year, to 5.6p a share, giving the company a prospective yield of 0.7%.
Valuation
As a fast-growing technology company, ARM has seen investors prepared to pay a premium for its shares. ARM trades at a historic P/E of 55, while its peers trade at an average historic P/E of around 42.
That said, ARM is on-track to grow earnings around 40% this year, which gives a PEG ratio of 1.3, indicating that the share price is only slightly expensive for the near-term earnings growth the firm is expected to produce.
Foolish summary
ARM’s rate of growth has been impressive during the past few year and many believe this trend will continue.
However, the firm currently trades at a very high P/E ratio and in this uncertain market, shares that are trading at a high valuation such as ARM are usually the most volatile.
So, all in all, due to the firm’s high valuation, I feel that ARM does not look safe to buy at 830p.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.
