ARM looks strong after results beat expectations

Aug 23 2010 by Andrew Miller, The Journal

ARM Holdings - We continue to reiterate our buy recommendation on ARM Holdings and we raise our fair value to 370p, based on both the improving fundamentals of the semiconductor cycle and positive earnings momentum.

Our fair value is based on a long-term DCF valuation.

ARM is the world’s leading semiconductor intellectual property supplier.

The company benefits from a relatively defensive revenue model in a highly cyclical sector, with strong royalty and revenue growth expected from its ever expanding licence base as we move further through 2010 and into 2011.

The stock has sustained its strong performance since the last upgrade in June 2009. This has been supported by better than expected Q2 results, along with the signing of new long term contracts.

ARM is positioned to benefit as the cyclical recovery continues and from its exposure to new product developments.

Rolls Royce – We are retaining our outperform (buy) recommendation on Rolls-Royce, but maintaining our 680p fair value.

Despite some recent weakness, the shares have performed well this year, both relative to the market and relative to the sector.

We think that the shares have further to run, driven by strong earnings momentum and a valuation which is still low relative to peers and the group’s historical range.

Thematically, we remain bullish on civil aerospace, which accounts for over half of Rolls-Royce’s operating profits. Recent order flow from the Farnborough airshow, coupled with guidance from aircraft manufacturers, supports this view, though the expected recovery in aftermarket has yet to materialise.

Other divisions, namely marine and defence, have already been performing well.

United Business Media – We are upgrading our recommendation on UBM to outperform. The majority of UBM’s businesses are late cycle and highly cyclical, such as exhibitions.

We have been waiting for these operations to show signs of trading picking up before turning more positive on the shares. This now looks to have happened, with improving visibility into 2011.

UBM should now see a pick-up in organic growth and is planning to augment this by bolt-on acquisitions. Regionally, the company should benefit from exposure to emerging markets, where it has developed a significant presence in Asia.

The shares look undervalued, trading at a discount to its peers in the professional publishing sector, on a 2011e PE of 10.3x. Our fair value of 640p is based on a discounted cash flow valuation.

By Andrew Miller, director, Barclays Wealth, Newcastle