ARM Holdings‘ (LSE: ARM) results today suggest to me it’s a good time to snap up the stock, taking a long-term view that its valuation has the potential to double over time to 2,000p a share.
But does the same hold true for Barclays (LSE: BARC)?
ARM: An Excellent Value Play
Don’t be worried that its stock came under pressure in early trade today — it was down 3.3% at 9.20 BST — in the wake of its second-quarter/half-year results, after a few brokers pointed out that its trading update was a touch light against expectations.
Yet, in my view, this is another very strong performance from a company that should continue to deliver value to shareholders for a very long time. In fact, I would not underestimate its numerous competitive advantages, including its business model, know-how, financial strength and so forth.
On a comparable basis, ARM is adding some £45m of revenues each quarter — growth is fuelled by higher chip shipments (“3.4 billion ARM-based chips shipped, up 26% year-on-year” in 2Q15) and licensing in the second quarter.
Its top line is growing 15% compared to one year earlier, broadly in line with the rise in its operating costs, up about £12m in 2Q15 vs 2Q14 — however, it looks like its 2Q15 cost-based performance has significantly improved over 1Q15 once first-half results are considered.
Its core operating margin is up: it stands at 52.9% in 2Q15 versus 48.9% one year earlier, while in 1H15 its operating margin is 52.3% vs 49.7% in 1H14. Incidentally, its interim dividend increased by 25%, while earnings per share are up 31% in 1H15 on a normalised basis. Currency adjustments are not meaningful.
These normalised figures are adjusted for acquisition-related charges, share-based payment costs, restructuring charges and other charges, but International Financial Reporting Standards results tell a similar story: ARM is growing as a more profitable entity.
The “problem”, the bears argue, is that its shares trade on 40x and 32x net earnings for 2015 and 2016, respectively. That’s a lofty valuation, true, but I’d be prepared to pay 70x earnings or more for a company that delivers without using debt to finance its operations, and one that is led by a strong management team.
Barclays Is Expensive
As far as equity investments that could double over time are concerned, how can we not mention Barclays, whose corporate strategy has come again under the spotlight in recent days.
The Times reported earlier this week: “Barclays is planning to cut more than 30,000 of its staff within two years as the struggling bank considers accelerating a group-wide cost-cutting programme after firing Antony Jenkins, its chief executive, this month.”
New efficiency measures “could lead to the lender’s global workforce falling below 100,000 by the end of 2017,” and “is thought to be the only way to address the bank’s chronic underperformance and hit an ambitious target of doubling its share price, according to sources“.
Let’s set the record straight: the valuation of Barclays is not going to double to 560p a share any time soon, simply because the bank will likely need some serious help from the business cycle — and interest rates are not going to rise significantly for at least five years or more, in my view.
Risk appetite is nowhere near where it should be to boost banks’ returns (as proved by quarterly results at all the major US banks last week), while Barclays’ capital ratios aren’t exactly a benchmark in the industry.
The Times‘ story was short-lived, anyway, with Reuters reporting on Monday that the British bank had set no new targets to cut jobs “beyond the 19,000 redundancies which it announced in May last year”, according to sources.
I wouldn’t be surprised to read about job cuts at some point, but any significant rebound in Barclays stock would unlikely last any longer than one or two trading sessions, in my view.
