Full-year figures from ARM Holdings suggest that the weakness revealed at Imagination Technologies, its rival chip designer, this week were specific to that company rather than indicating any structural problem in the semi-conductor market or with supplying Apple.
The market’s reaction to the ARM figures was instructive, though, the shares veering all over the place but ending down 41p at 899p. Some concern was over the growth in processor royalties, made when the company’s chips are shipped to manufacturers of smartphones and the like. A 31 per cent rise in the fourth quarter translated into one of only 24 per cent if you stripped out some catch-up payments from one client and was below the 37 per cent in the third quarter.
ARM was quite open about this, headlining the adjusted figure. Some other analysts worried that the guidance for this year as being “broadly in line with market expectations” left room for a subsequent downwards adjustment; others were reassured that there was no warning for 2016. You pays your money . . .
The real distinction between ARM and Imagination is that the former has diversified more successfully from the core mobile devices market, 55 per cent of revenues coming from elsewhere, whether in cars or the “internet of things” generally. Of that other 45 per cent, a proportion does go to Apple, but this is less than 10 per cent of the total across the group and you would have to take a pretty gloomy view of prospects for the world’s most profitable company to see this as too much of a negative.
Fourth-quarter licensing revenue, gained when ARM chips are adopted in a new device, were flat, but this is against strong comparatives a year ago. The company has indicated that it can grow revenues by 15 per cent more than the market as a whole in the medium term.
It invested more than £200 million on R&D in 2015 and, with £951 million in the bank, can afford to do so and more. This and the 51 new licenses signed in the last quarter are the engine for future growth. The shares sell on a hefty earnings multiple of 27.5 for 2016. I would back ARM to stay ahead of that semi-conductor market, which goes a way to justifying the price.
$9m catch-up payments in Q4
£951m Net cash pile at December 31
MY ADVICE Buy long term
WHY The earnings multiple is a high one, but ARM will comfortably outperform the market and price fall looks like a buying opportunity
When Steve Wadey joined QinetiQ as chief executive last April, there was a perception that the defence technology contractor, spun out of the Ministry of Defence in 2002, had not achieved its full potential as a quoted company. QinetiQ has undoubted skills in managing engineering support programmes and missile testing ranges, but two thirds of the work is still done for the MoD at present.
Not a lot has happened since and the shares have come under pressure along with those of other defence companies. QinetiQ acknowledged the uncertainties in its third-quarter trading update. The government’s defence review, published in December, should be positive in due course, but it is leading to delays on some contracts, while the annual round of squeezes is under way on margins that single-source contractors can charge.
The company has plenty of cash to take advantage of opportunities; indeed, it is engaged in a second round of defence buybacks. A recent MoD aircraft contract worth £153 million boosted orders. The potential is there. On 14 times’ earnings the shares, up a penny at 224½p, look up with events, though.
66% amount of revenues from MoD
MY ADVICE Avoid for now
WHY Potential is there but will take time to come through
Electrocomponents
2% revenue rise in four months
After Premier Farnell cut its dividend last year, sending the shares sharply lower, there must be concern that this year’s payment from its rival Electrocomponents is barely covered by earnings. The electronics components distributor is not getting a lot of help from its end markets and the 5.7 per cent dividend yield is the main support for the shares.
An update for the four months to January 31 shows British sales stabilising and continental Europe still growing at a double-digit rate. The United States, though, with its seemingly intractable slowdown in industrial production, is getting worse, and faster. The company has been reorganising its business in Asia Pacific, a fairly small market, too, with some inevitable disruption.
Across the group, then, the rate of growth in the four months slowed again to 2 per cent. The hope is that the £25 million of cost-cutting in train, hefty in the context of a company expected to make about £72 million pre-tax this financial year to March 31, will allow margins to improve and earnings to grow again from next year.
This suggests that the dividend is safe and investors should not rush to sell. Investing in both Premier and Electro is a question of hitting them at the right point in the cycle. I suggested the other day that the former should have bottomed out, but I am not so sure that in Electro’s case the shares, up 2p at 207½p, and selling on 14.6 times’ next year’s earnings, are on the way up again soon, although that yield might be attractive to some.
MY ADVICE Avoid for now
WHY There seem no obvious catalysts for price to rise now
And finally...
It is fair to say that Victrex is not much followed in the City and not much known outside its native northwest. It makes PEEK, a specialist plastic that goes to industries including consumer electronics, via Apple, and oil and gas. These two factors have been holding back the shares, which were above £19 in early December, and will remain a drag. The first-quarter trading statement was confident enough and the shares rose 35p to £14.20, analysts having suggested £15 as a useful entry point.
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