ARM Holdings prospering on a path of no surprises
ARM Holdings (ARM.L) bestrides the world's chip market. ARM-designed chips are in just about any digital device you care to mention, from mobile phones and play stations, MP3 players, TVs and cameras, to printers, hard disk drives, smart cards and motor vehicle power trains.
Right now its partners are shipping products that contain ARM-designed chips at a rate of two billion units a year.
By 2010, ARM expects the rate to be 4.5 billion chips a year, Chairman Sir Robin Saxby (pictured) told an audience gathered by The Chartered Institute of Marketing at ARM's Cambridge head office last week.
There can be few British companies that are so pervasive in their markets. It is ranked by Dataquest as the number one semiconductor intellectual property supplier in the world. It licenses its IP to partners that include 19 of the top 20 semiconductor sellers worldwide. It is a global corporation with over 1,250 employees and facilities in 12 countries on three continents
Your columnist is therefore surprised that ARM is not in the prestigious FTSE 100, shoulder to shoulder with the biggest and best of Britain's companies. It is currently the 140th largest company on the London stock market with a market capitalisation of £1.9 billion, which would need to be 60% bigger for it to squeeze in at the bottom end. Of course, for a while in the late 1990s it was in there, dragged in on the coattails of the dotcom bubble, but has been on the outside ever since it burst.
I think this irks Sir Robin, who said that back then he too squeezed into The Sunday Times Rich List based on the paper value of his shareholding. (The records show he now owns 19.5m ARM shares worth about £27m). He doesn’t miss the begging letters that inevitably followed the personal publicity but I suspect he feels, like me, that ARM isn’t getting its due recognition.
Last year ARM suffered in the stock market when it missed some quarterly numbers. Instead of hitting the forecast 20% sales growth it had to concede it would only make a not-to-be-sniffed-at 15%. It had previously upset stock analysts in 2004 when it bought Artisan Components, a Californian chip designer, for £500m. Its share price fell 19% as some reckoned it had bitten off more than it could chew and that it had paid too much into the bargain.
Subsequent events have confirmed the ARM board's judgement as Artisan has boosted revenues and enhanced its product range without derailing other parts of the business. Yet even though ARM's share price has gained 43% this year Sir Robin is still irritated by the company's treatment at the hands of the market over these two issues.
Mirage
Is this mirage of disappointment the reason why it's not in the FTSE 100? Perhaps partly.
But 2003 saw a real setback when the company had an earnings blip, in which though still profitable, earnings per share dipped by 53%. Because the company so dominates the design stage of the chip industry, it is susceptible to general down turns in the industry.
But maybe it has taken the recent run of good quarterly numbers and, crucially, no more surprises, to get the share price back on a steady climb.
At its current price around 136.5p, the prospective price to earnings ratio is 28, which marks it out as a growth stock. Yet with a strong balance sheet and a record of generating cash stretching back a decade, it is also a secure stock. Consensus forecasts are for earnings per share price growth of a whopping 125% this year and 28% in 2007. Eleven out of 17 analysts following ARM rate it as a buy (The others are neutral).
Could it last be heading back to the FTSE 100? It would be appropriate for the Cambridge Cluster to have a home grown representative in the index, given the region's profile and contribution to innovation.
But one of the key reasons for ARM's success could also be the 'problem', if not being in the FTSE 100 is indeed one. It is its business model.
In the beginning ARM set out to be different. While other chip makers were focussing on product performance alone, ARM set out to specialise in low-cost, power-efficient processor designs. It succeeded better than could have been expected back in the pioneering days of 1991.
Yet it makes about 7 cents on each chip shipped by a partner. On that basis even the expected 2010 shipments of 4.5 billion units deliver revenue of 'only' $315m. How can this compete with the approaching oil price of $100 a barrel that keeps BP comfortably atop the FTSE pile?
7th May 2006
