You may have seen that I picked up a ‘Starter Position’ in ARM Holdings (Epic Code ARM) on Tuesday 18th August at 927.4p via a Spreadbet. I know my timing wasn’t perfect although I don’t think I am miles away from getting them at a good price. I will cover this more in the Charting bit at the bottom of this Blog but my thinking behind this move is that ARM does not get this cheap very often - and I wanted to get a foothold on the Stock from which I can then build a big position.
I often find with Great Stocks that unless I actually get my Cash out and buy a Small Stake I sort of forget about them and they drop off the Radar as something else jumps up and down and takes my attention - the ‘Availability Heuristic‘. I suppose this could be fixed by a stricter Watchlist Discipline but it never seems to happen !!
ARM is a truly Class Act Quality Business, listed on the FTSE100, and I think there is a superb opportunity for me to make a nice pile of Cash out of this on a Long Term view.
I am rather busy at the moment so I will hand this bit over to the Company to explain itself - over to you Mr ARM:
“The world's leading semiconductor intellectual property (IP) supplier
ARM is at the heart of the world’s most advanced digital products. Our technology enables the creation of new markets and transformation of industries and society. We design scalable, energy efficient-processors and related technologies to deliver the intelligence in applications ranging from sensors to servers, including smartphones, tablets, enterprise infrastructure and the Internet of Things.
Our innovative technology is licensed by ARM Partners who have shipped more than 60 billion Systems on Chip (SoCs) containing our intellectual property since the company began in 1990. Together with our Connected Community, we are breaking down barriers to innovation for developers, designers and engineers, ensuring a fast, reliable route to market for leading electronics companies.
- The world’s leading semiconductor IP company
- Founded in 1990
- Over 60 billion ARM based chips shipped to date
- Over 1100 licenses signed with over 300 companies
- Royalties received on all ARM-based chips
- Gaining market share in long-term secular growth markets
- ARM revenues typically grow faster than overall semiconductor industry revenues.
The ARM business model involves the designing and licensing of IP rather than the manufacturing and selling of actual semiconductor chips. We license IP to a network of Partners, which includes the world's leading semiconductor and systems companies. These Partners utilize ARM IP designs to create and manufacture system-on-chip designs, paying ARM a license fee for the original IP and a royalty on every chip or wafer produced. In addition to processor IP, we provide a range of tools, physical and systems IP to enable optimized system-on-chip designs.
With the diversity of ARM IP and the broad ecosystem of supporting silicon and software for ARM-based solutions, the world's leading Original Equipment Manufacturers (OEMs) use ARM technology in a wide variety of applications ranging from mobile handsets and digital set top boxes to car braking systems and network routers. Today ARM technology is in use in 95% of smart phones, 80% of digital cameras, and 35% of all electronic devices.”
The Company’s Website can be found here:
- Pretty much the Highest Quality Unique Tech Growth Stock you will find on any Stockmarket anywhere in the World. If Carlsberg did Chips, they would be like ARM’s……….
- Rare and Unique Chip Designer with Licence and Shipment Royalties from pretty much any Semi-Conductor Manufacturer and Gadget Producers of any sort from Smartfones to Laptops to Tablets to Internet of Things stuff.
- Takeover a very real possibility. There are very few Chip Players left on the UK market and they are not abundant Worldwide - and none have the pedigree of ARM.
- One of Britain’s few truly World-Class and Outstanding Businesses.
- Barriers to Entry higher than the Petronas Towers - it is said that from the Moon you can see ARM’s Economic Moat (I said it about half an hour ago). You could give me all the GDP of the US and I could not replicate what ARM does.
- ARM is a sneaky way of playing the emerging Mega-Trends of ever increasing Tech Connectivity and proliferation of Gadgets. Things like Robotics, 3D Printing, Driverless Cars, Internet of Stuff, Artificial Intelligence etc. all require Chip Designs from ARM. It is a great alternative to buying a Tech Fund and is the ultimate ‘Picks & Shovels’ play. A forward P/E multiple of 23 Ex Cash may seem expensive but in a few years I suspect this will turn out to have been incredibly cheap. It is worth also considering that there are probably many future applications for ARM Chip Designs that have not even been envisaged yet - if you think back 10 years no one had even dreamt of an iPad. ARM really is a ‘Buy and Hold’ Stock to tuck away and watch it gradually head upwards over many years.
- Shares currently trading on an unusually low P/E (relatively speaking) - ideal time to be building a Stake in such a Leading Technology Company.
- Fast growing Dividend although currently a low yield - hold this a few years and you will have big Divvy Payments.
- Net Cash position around £903.8m - means a Very Strong Balance Sheet and gives ARM options for Bolt-on Acquisitions.
- Share Buyback programme in place and a Strong Balance Sheet to keep this going.
- £99.4K Director buy on 30th July 2015 which must have been at around 990p.
- Former CEO of many years, Warren East, left recently for Rolls-Royce. I doubt this will make much difference to ARM, but it could mean a change in Strategy over time which may not be as good - but if Warren East was as good as he is reputed to be, then he will have left a Business in good shape behind him.
- ARM tends to fluctuate with the fortunes of Apple AAPL to some extent - this is because AAPL is obviously a very large customer and of course a potential Buyer if a Takeover comes about. AAPL recently disappointed the Market but this was absurd - they still grew Sales by something like 35% and only missed forecasts by a small amount. Usual Market silliness.
- In the Results for the Second Quarter and Half Year released on 22nd July 2015, Licencing Revenues were only up about 3% and this disappointed the Market. Going forward, Directors expect Licencing Revenues to grow at 5% -10% a year although this is down from much higher rates previously. It’s important to understand however that ARM gets Revenues from Royalties on each Chip that is shipped in a Device as well - these are expected to grow at very strong rates - around 30%. OK, Licencing Revenues are down on what they once were, but many companies would kill for growth like this - and it’s also worth realising that Margins are huge.
- Global Recession could hit ARM - but as usual this is an argument against Stocks in general, not just for ARM.
- The Market might not give ARM the kind of P/E Rating it used to give ARM in the past - this is a very real risk but if ARM drops it just gets cheaper and I will happily buy more. To give some context, ARM is on the same kind of P/E Rating as Greggs (GRG) the Sausage Roll people…..
- ARM may not be able to keep pace with rapid Technological Change in Chip Design and may fall behind. This seems unlikely though as ARM has led the World for the last 15 years or more and seems to set the trends that others follow.
- ARM gets bought out for too low a Price - this would be annoying but it is a Risk I am happy to take on as it would no doubt be higher than the Price I paid and it is part and parcel of Investing - it’s a High Class Problem.
- New Management go on a crazy debt-fuelled acquisition spree and buy lots of average businesses with no real synergies and basically wreck the Business. This could happen and if I get a sniff that this is going on, then I can always dump the Stock. I don’t foresee this happening.
- The Shares drop a lot more in September / October in a wider Stockmarket meltdown - this is very likely but it just means I can buy more at better Prices - bring it on I say !!
If you look at the ShareScope ScreenShot below, in the Top Right Hand Corner you should see ‘Norm EPS (p)’ for ‘Dec 2016 Forecast’ of 36.63p. At my Buy Price of 927.4p this gives a Forward P/E Ratio (Price divided by Earnings) of 25.3.
However, as at 30th June 2015 ARM had £903.8m of Cash on its Balance Sheet which is worth about 70p per Share, strip this out and you get an Ex-Cash Forward P/E for 2016 of 23.4 (927.4 minus 70 divided by 36.63).
As I have outlined earlier in this Blog, ARM is very much a High Growth, Quality, Trophy kind of Stock - Market Players are prepared to pay up for such Class and this is where the opportunity lies. For many years ARM was one of my utter favourite Stocks and I traded in and out of it a lot (yes, I was stupid, I should have just bought it and held it but everyone has to learn !!), but for pretty much the last 4 years it has been unbuyable for me as it was on just too high a Rating. For much of this time it was trading on a P/E of 40 plus and even hit 50 I think at one point - utter madness but I have no issue buying a Stock on a P/E of 23 if I feel the Market will re-rate it upwards to a silly P/E again - this is very likely, especially as it is seen by many as a Takeover Candidate for perhaps some Tech Monstrosity like Apple AAPL.
You don’t really buy a Stock like ARM for the Dividends, but there is a little bit to pick up while I wait and this should rise quite swiftly over time. In fact, the recent Interim Divvy Payment was up 25% on the year before - this is why the Market is so keen on the Stock - the Growth all over it is rapid.
If you look at the ScreenShot, you will see the ‘Dividend (p)’ for ‘Dec 2016 Forecast’ is 7.2p - on my Buy Price of 927.4p this gives a Dividend Yield for Next Year of 0.78%. However, if you look at the next year, I should pick up a Divvy of 11.85p - this gives a Divvy Yield of 1.28% - Note how fast the Dividends are expected to grow.
As ever, patience will be needed but it is not hard to imagine ARM back on a Forward P/E of certainly 35 and maybe even 40. On a Forward P/E of 35 for Next Year, this gives a Target of 1282p (in theory you could add another 70p on for the Cash which would give a Target of 1352p).
On a Forward P/E of 40, this gives a Target of 1465p or 1535p if we add on 70p for the Cash.
In a few years, it’s not hard to imagine 50p of Earnings Per Share and on a P/E of 40 that gives a Target of 2000p - that’s got you thinking !!
From a Chart viewpoint, the obvious Target is the recent All Time High up around 1230p. If it can get back up there, it represents 32% Upside on my Buy Price which is more than likely to happen. I would imagine this will be a tough Resistance Area to get through, but once it does, it will run.
So clearly there is plenty to aim at.
As per all my Buy Rationale Blogs, the Chart ScreenShots from ShareScope were taken on the Night before I bought the Stock - so this was the situation that I was confronted with when I made my Buy Decision - although I had been stalking ARM for a few weeks.
The Chart below shows the Long Term picture for ARM - going back to 2008. As you can see, there is a very clear Uptrend Channel that I have marked with a Red Top line and a Black Bottom line. You should be able to see that the Price was down near the bottom of the Channel when I decided to start nibbling.
There are several things to note - firstly the Black Arrow points to a small Hammer Candlestick which was generated on the Monday when I made my Buy Decision. This is not a wonderful Signal but it is hinting that the Downtrend may be coming to an end.
The Blue Arrow marks the Top Line of the Downtrend Channel - clearly I need the Price to Breakout of this Line to enable the Price to properly start moving up or at least going Sideways. Such a Breakout would be a great Buy Signal for a Topup of my Starter Stake.
The Red Arrow points to a 50 Day / 200 Day Moving Average ‘Death Cross’ - this is not so good and could put the dampers on the Stock for a while. However, I often find that the Price can move up after such a Death Cross and it can quite quickly do a ‘Golden Cross’ as the Moving Averages improve.
The bottom line here is that I might not have picked the Bottom perfectly, but I suspect it is close enough that I may get a bit of drawdown in the Short Term but with a 6 month view this will look like a great Entry Point to start building a Chunky Holding.
Right, that’s ARM done, wd.