During 2013, I’ve looked at most shares in the FTSE 100 and graded them against these five quality and value indicators:
- Dividend cover
- Borrowings
- Growth
- Price to earnings
- Outlook
Some companies scored highly against the business quality indicators of level of borrowings, earnings growth record, and outlook. Some shares scored highly against the value indicators of dividend cover and price-to-earnings ratio (P/E).
Quality and value in harmony
However, the most promising investment opportunities scored well on both business quality and valuation indicators.
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In this mini-series, I’m revisiting some of the highest scoring shares to look at events since the original article and to assess the quality of the investment opportunity now. Some of these high-scoring firms could be investment winners for 2014 and beyond so, today, I’m revisiting ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US), which scored 22 out of 25 in February.
Continuing strong growth
Since my article in February, ARM’s then president, Simon Segars, has taken on the CEO role following the retirement of his predecessor. Mr. Segars reckons that opportunities for the firm’s high-performance, low-power technology are increasing thanks to increasing inter-device connectivity.
The firm licenses its technology to leading semiconductor and equipment manufacturers, which incorporate ARM’s processor and other technology designs in devices such as smart phones. A recent blistering set of third-quarter results confirms that growth is still on track. Year-to-date revenue is up 27% compared to a year ago, earnings per share up 44% and operating margins are up 9% to 49.2%. Such a strong operating-margin performance seems to demonstrate the value of the new market opportunities that ARM is seeing as well as the strong position that the firm enjoys in its sector.
Valuation
With the shares up just 5.2% since February, at around 970p, the forward P/E ratio is down a little at about 38. That looks ahead of earnings and yield expectations, but ARM has been expensive for as long as I can remember, with good reason: net cash on the balance sheet, the dividend covered more than three times by earnings, continuing robust earnings and cash flow growth, and a positive outlook all ensure ARM continues to score the maximum five out of five against my business-quality indicators. Going forward, the firm asserts that it is entering the final quarter of 2013 with a record order backlog and a robust opportunity pipeline.
What now?
ARM enjoys a strong economic franchise underlined by recent improvements in operating margin. However, robust business performance comes at a price and ARM shares still look expensive.
