The Investment Column: ARM survives and prospers in 'chips with everything' age
Toledo Mining; John David Group
Edited by Andrew Dewson
Published: 27 April 2007
Our view: Buy
Current price: 140p
The chances are that anyone reading this uses several ARM chips on a daily basis, either in the car, mobile phone or even the washing machine. Once the darling of the technology market and, for a brief period, a member of the FTSE 100, ARM's glory days might appear to be long gone.
But ARM has survived and although its share price remains a fraction of its all-time high, the company looks to be in better shape than it has ever been. ARM does not manufacture anything; rather, it designs chip cores then licenses its technology on to manufacturers who also pay a royalty to ARM every time it ships a product that contains an ARM chip. The group has an impressive client list, including Sony Ericsson, Samsung and Toshiba.
Although the company remains heavily weighted towards the mobile phone industry, with about two-thirds of revenues coming from telecommunications, it has not suffered as sales growth slows because more chips are being used in third-generation handsets which require more than one chip. It expects to derive 50 per cent of its revenues from non-telecommunications sources later than the previous estimate of 2010.
Yesterday's figures, with $45m (£22.6m) of royalties in the first quarter, a 23 per cent increase on the same period last year, emphasise that ARM is a maturing business. The doubling of the dividend to 2p per year and the increased pace of the £100m share buyback programme also indicate that ARM is confident about its future prospects. Although first-quarter pre-tax profits declined from £24.7m to £21.6m, mainly thanks to the weak dollar, top line revenue is forecast to grow at 15 per cent per year with gross margins a mouth-watering 89.5 per cent. Operating margins remained just over 30 per cent.
Trading at 28 times forecast full year earnings, the shares represent the best value in the sector. ARM's technology is not overly reliant on any single customer, and although the chip market is cyclical with more and more household goods going digital the future looks bright for ARM. Buy.
Toledo Mining
Our view: Worth a punt
Current price: 277.5p
As any small cap resource investor will confirm, making the quantum leap from explorer to producer is the key to a re-rating and Toledo Mining is a perfect example. The shares have surged over 130 per cent since January since the company began making shipments of laterite nickel ore from its Berong mine in the Philippines.
Laterite nickel is mainly used in the manufacture of stainless steel and in China Toledo has an almost insatiable consumer on its doorstep. Toledo is on track to hit its first year production target of delivering 900,000 wet tonnes of laterite nickel from Berong, which holds up to 275 million tonnes with a high nickel grade of 1.3 per cent.
Toledo's share price has been driven by two factors - the move into production and the high price of nickel. There is a global shortage of new, large-scale nickel projects and Toledo has found itself in the right place at the right time.
Clearly, investors need to be wary of any company that relies heavily on a single market and whose main product currently stands at an all-time high. But even if the price of nickel falls it is unlikely to drop to the extent that Toledo is unable to make money. Gross margins currently stand at just under 70 per cent, and although the shares have surged there is plenty more long term upside left in Toledo. The stock is not without its risks but has exciting potential even at the current price.
John David Group
Our View: Hold
Current price: 491.25p
The sports retailer John David has started the year on a high, unlike England's footballers and cricketers.
Like-for-like sales rose 7.5 per cent in the 12 weeks to 21 April, helped by the recent sunny weather and improvements to its ranges.
Yesterday, the group, which owns the JD sports shop chain, posted strong full-year results for 2006 with pre-tax profits leaping 51 per cent to £25m on an 8 per cent rise in turnover to £530m. However, chairman Peter Cowgill warned that more challenging times lie ahead, pointing to interest-rate hikes potentially putting a curb on consumer spending and weaker comparatives after last summer's World Cup football tournament in Germany. Given England's dire form in European championship qualifiers and the lack of any major summer tournaments, matching last year's performance will be tough.
That said, the stock has been climbing since the beginning of the year and the signs are that the company is in good shape. John David has a strong management team that is investing £10m a year on a refurbishment programme at its stores.
With Sports Direct revealing little to excite investors, John David appears a safer bet. However there does not appear to be enough upside potential at the current price to warrant recommending a buy on the shares. Hold.
