Bloomberg News

ARM Holdings Investors Beat Analysts in Stock Value Divide

July 01, 2011

(Updates with closing share price in sixth paragraph.)

July 1 (Bloomberg) -- ARM Holdings Plc, the U.K. designer of chips that power Apple Inc.’s iPhone, is dividing investors and analysts more than any other company in the benchmark FTSE 100 Index. So far, shareholders are the winners.

ARM is the index’s best performer over the past six months, 12 months, 18 months, two years and three years, according to data compiled by Bloomberg. Analysts are more negative on the stock than on any other in the index, based on the proportion of “sell” recommendations, the data show.

“Analysts have got it completely wrong,” George O’Connor, an analyst at Panmure Gordon & Co. in London who put a “sell” rating on the stock in September, said in an interview. “Investors are right. ARM is at the pivotal point of a changing industry and is enjoying this window of opportunity.”

ARM’s technology dominates the market for processors that run smartphones. Sales of the devices jumped 72 percent last year to 297 million units, according to Stamford, Connecticut- based market research firm Gartner Inc. That helped ARM more than double 2010 earnings to 86 million pounds ($137.5 million).

The shares have more than doubled over the past year, compared with a 21 percent gain in the FTSE 100 Index. Over the past three years, the stock has surged by more than seven times compared with a 5.7 percent increase in the index, boosting ARM’s market value to 7.9 billion pounds.

‘Nice Business’

Over that period, ARM has gained more than twice as much as every other company in the index, except for financial adviser Hargreaves Lansdown Plc, which more than quadrupled. ARM gained 5.5 pence, or 0.9 percent, to 593.5 pence in London trading.

“We got it right because we felt we understood the business model,” William Fries, manager of the $30.4 billion Thornburg International Value Fund, said in an interview. “A small piece of every handset is a nice business.”

The increase in the share price means that ARM is currently trading at 61 times earnings before interest, taxes, depreciation and amortization, making it more expensive than any of its competitors.

“It is expensive, but the opportunities are more real than they have ever been,” Nick Hyslop, a London-based analyst at RBC Capital Markets with an “outperform” rating on the stock, said in an interview. “It would be a brave person to bet against ARM being successful in computing.”

Microsoft Corp., the world’s biggest software maker, said Jan. 5 that Windows 8, its operating system due to be released next year, will be able to run with ARM-designed chips.

Sell Ratings

Fourteen, or 42 percent, of the 33 analysts rating the Cambridge, England-based company recommend investors sell the shares, according to Bloomberg data. That’s the highest percentage of such ratings in the FTSE 100 Index. Nine companies in the index, including Imperial Tobacco Group Plc, Land Securities Group Plc and Fresnillo Plc have no “sell” ratings from any analyst, Bloomberg data show.

Ten analysts rate ARM a “buy” and nine have a “hold” recommendation. Most analyst “sell” ratings on ARM are based on the stock’s valuation, rather than a poorer outlook for the company, said Fries. His fund acquired ARM shares about two years ago and held 31.7 million shares, or 2.4 percent of the company, as of March 1, filings show.

Thornburg Investment Management Inc., which is based in Santa Fe, New Mexico, owns 65.9 million shares in different funds on behalf of clients, making it ARM’s fourth-largest investor, Bloomberg data show.

U.S. Owners

Eight of ARM’s 10 largest investors are U.S.-based fund managers. Janus Capital Group Inc., which owns 72.9 million shares, or 5.4 percent, is the largest investor, according to filings compiled by Bloomberg.

ARM Chief Financial Officer Tim Score declined to comment on the share price performance or ratings by analysts.

ARM was created in 1990 from a venture with Cupertino, California-based Apple, according to the company’s website. Founded as Advanced RISC Machines, ARM was spun out of Acorn Computer Group Plc, which made personal computers.

The U.K. designer now sells its chip blueprints and receives royalties from shipments of semiconductors. A total of 1.85 billion processor chips with ARM’s designs were shipped in the first quarter, the company said on April 27.

“The winners of one phase have not always translated into the winners of the next phase,” said O’Connor, who doesn’t plan to change his rating. “At some point the valuation argument will win out. In the end, valuation anomalies don’t exist.”

--With assistance from Christopher Condon in Boston and Jonathan Browning in London. Editors: Tim Farrand, Rodney Jefferson

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net.


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