Strong performances across the board

Jun 1 2010 by Andrew Miller, The Journal

Share Watch with Andrew Miller

ARM Holdings - We continue to reiterate our outperform recommendation on ARM Holdings (ARM), and we raise our fair value to 290p, based on the improving fundamentals of the semiconductor cycle and its positive earnings momentum.

ARM is the world’s leading semiconductor intellectual property supplier. ARM benefits from a relatively-defensive revenue model in a highly-cyclical sector, with strong royalty and revenue growth expected from its ever-expanding license base as we move further through 2010. The stock has sustained a strong performance since its last upgrade in June last year. It has recently released better-than-expected Q1 results, and is positioned to benefit as the cyclical recovery continues and from its exposure to new product developments.

Experian – We are upgrading our recommendation on Experian to buy and have revised our fair value to 706p. Management’s guidance is becoming more positive, and recent data is showing some easing in US credit conditions. Cashflow has been excellent, and the group is deleveraging rapidly. As a result, Experian now offers the highest cash return in the sector. With the shares also offering some gearing to a cyclical recovery, we see Experian as an attractive investment opportunity. In addition, given the sovereign debt issue facing European markets, we find it reassuring that only 5% of Experian’s revenues is now derived via these markets.

WPP Group – Shares in WPP have outperformed the market over the last year, but we believe there is more to go for and are therefore reiterating our outperform recommendation. Growth in global advertising has been improving as we progress through 2010 and forecasts for the advertising market have recently been upgraded for this year and 2011. The corporate sector is seeing a recovery in profits from recession lows, and this is providing room to increase marketing budgets. We therefore continue to expect the agencies sub sector to outperform as the market anticipates growth from the recovery. We also expect WPP to outperform its advertising peers, due to diverse geographic exposure and leading positions in a number of disciplines, plus synergies from the integration of TNS, which should also support margins. We have based our fair value of 785p on a target 2011E PE of 13.5x, which is a small discount to WPP’s historical average.