Arm, the UK-based chip designer, has beaten market expectations with a surge in sales of smartphones and the launch of the first mobile computers based on its technology.
In a tough economic climate the company reported full year profits of £96.8m, down 4%, and said 2010 figures were expected to be in line with expectations, with the semiconductor market set to show signs of improvement. Smartphone sales grew by 15% in the third quarter whilst overall mobile shipments were flat, the company said. A range of businesses have recently announced smartphones and mobile computers based on Arm's technology, including Dell, Google, HP and Motorola. However it is not clear if its designs are in the much hyped iPad launched last week by Apple. At Arm's joint broker Investec, analyst Gareth Evans said:
Today's results add to the view that Arm will continue to outperform the broader semiconductor market – a view that management have reiterated in the outlook statement. We retain our buy stance and elect to upgrade our discounted cash flow-based price target to 215p.
But Paul Morland at Astaire Securities thinks the shares may be up with events. He said:
During 2009 Arm effectively demonstrated the resilience of its business model and has delivered an impressive set of results. Consensus for 2010 is £338m of sales (Astaire £338m), earnings before interest and tax of £115m (£116m) and earnings per share of 6.6p (6.6p). We expect this to move up by 2% to 3% on the back of today's announcement. Arm has consistently outperformed the semiconductor industry and should continue to gain market share in 2010 and beyond. However, at 190p the shares are trading on almost 30 times forward earnings and without significant upgrades, we see little scope for material upside in the short term. We maintain our hold recommendation.
One thing to take into account is the possibility that Arm will join the FTSE 100 next week. The index compilers, FTSE Group, have said that Cadbury will be deleted from the FTSE 100 next Monday, if the offer from Kraft is declared wholly unconditional. Cadbury will be replaced by the company on the reserve list with the highest market capitalisation at close of play on Friday. As things stand at the moment - that is, based on last night's prices - that company is Arm.
