Financial Accounting Case Study: arm holdings Plc Stock Market Value vs. Visible Equity The Tech Market Amplification Lex Bradshaw-Zanger January 2003 Stock Market Value vs. Visible Equity – The Tech Market Amplification Introduction
Download 210.94 Kb.
|
1 2
- Navigate this page:
- Hitachi and MIPS Technologies
- Nokia
- ARM Holdings Plc
- Strengths Weaknesses Economic Environment
- Industry; Market; Country
- Strategy Operations
- Financial Analysis
- Stock Market Ratios
What Harm Could Come to ARM?Yet with ARM now trading at a price-to-earnings ratio of 324 times, compared to 203 times at Rambus, which designs and licenses computer memory, there is little room for any disappointments. And already some murmurings of disquiet are being heard, albeit faintly, from some quarters. "ARM is basically a fantastic company with great fundamentals, but there are a few areas of concern," says one analyst who wished to remain anonymous. What on earth could they be? "Competition, for one," says the analyst. Although ARM dominates the 32-bit segment of the RISC, or reduced instruction set computing, processor market, the analyst says he has spoken to Hitachi and MIPS Technologies, and they have both indicated that they intend to compete fiercely in this market. In fact, MIPS is already hawking its 32-bit technology at bargain prices in Japan. Indeed, companies such as MIPS and Hitachi are much larger and more diversified than ARM, which still relies heavily on supplying the mobile phone market. Some 75% to 80% of ARM's sales this year are expected to be in the cellular market, of which 70% are with a single company, Nokia. Should sales of handsets start to fall -- Paribas, the European brokerage, predicts Nokia's handset sales will slow to 69% this year and 44% in 2000 from 90% growth last year -- the company's bottom line could be seriously affected. And the following chart shows the evolution of the ARM stock price on the London Stock Exchange over the last 5 years compared to the FTSE All Share Index:6 
Questions: Q1. Identify the main strengths and weaknesses of the ARM concept and the company. Q2. Calculate the value of ARM Holdings Plc using the book value method. Q3. Explain the difference between value and market analysis in the decision to purchase stock. Q4. Would you purchase stock in ARM Holdings Plc? And why? ARM Holdings Plc Q1. Identify the main strengths and weaknesses of the ARM concept and the company.
Q2. Calculate the value of ARM Holdings Plc using the book value method. Since this market is liable to great fluctuations, it is unwise to use any type of dynamic valuation method that relies on future cash flows; to predict anything in the technology markets is currently both extremely difficult and unwise. Therefore the calculation of the book value of ARM Holdings Plc. is as follows: Book Value = Assets – Debts (as at March 2002) Book Value = 187.6 – 36.8 = £ 150.8 Million Q3. Explain the difference between value and market analysis in the decision to purchase stock. In a bull market, nobody worries too much about which shares to buy, market analysis is easy ‘on-the-up’ and growth investors buy and sell at ease making profits in the short-term. When the markets turn, there seems nowhere left to go but back to value as we can no longer gamble on what seems like a non-stop elevator to wealth. By way of definition, value investors believe that the market always overreacts to news, either good or bad. When the news is good, the stock price zooms up; out of proportion to the long-term affect that news is likely to have on the company’s future performance. By contrast, when unexpected bad news happens, the offender’s share price typically takes a worse drubbing than the fundamentals dictate. Value investors scan the market for stocks that growth investors once loved, but are now dumping. Value investors don’t buy stocks just because they’re cheap; they have to be assured that the problems are temporary, or solvable. Value investors hold these stocks until their prospects once again look bright, and then they sell them back to growth investors. Value investing requires a much longer-term outlook than growth investing. Where growth investors might typically hold a stock for six months to a year, value investors plan on holding their picks for three to five years. Value investors don’t try to predict which way interest rates are heading, or the direction of the market or of the economy. They don’t look at stock charts and they don’t pay attention to analysts’ buy/sell ratings or earnings forecasts. Value investors don’t try to determine if all the bad news is already built into the stock’s price, or if further disappointments will drive the share price down further. Value investors view all industry sectors as cyclical, meaning that each sector, and hence the stocks making up that sector, will go through periods of out performance when market mavens predict strong sales and earnings growth for all participants for the foreseeable future. Then, as sure as night follows day, the sector companies over-expand their manufacturing capacity, growth falters, profit margins contract in the face of product oversupply, and stock prices plunge. Eventually the excess capacity is absorbed, demand picks up, and the cycle repeats. Rather than trying to predict the timing of these cycles, value investors compare a stock’s current valuation ratios (e.g. price/earnings or price/book) to their historical ranges, and from that information determine whether it’s time to buy or sell the stock. Both value and market analysis (growth investing) come and go as fashions, where for many years the stock market had proved to be the best investment available, the current downtrend has brought value analysis and hence value investors back into the limelight. As with company valuation, we must today use a combination of both market and value analysis to be analyse and make decisions in the stock purchase arena. Q4. Would you purchase stock in ARM Holdings Plc? And why? Having analysed the current position of ARM Holdings and the overall market situation, this seems to be an ideal time to purchase stock in this company. The accounts themselves tell a very positive story with a both profitable and efficient business model. The tech markets decline has led to a re-valuation of this type of stock, and the current price seems very in-line with its value. As one of the leaders in the microprocessor market, ARM is perfectly positioned to reap future rewards from any developments and changes that occur. 1 Chris Bell, Framlington NetNet Fund 2 ‘Bogle on Investment Performance and the Law of Gravity: Reversion to the Mean – Sir Isaac Newton Comes to Wall Street’. Remarks by John C. Bogle, January 29, 1998. 3 Princeton University Press 5 Nick Watson, U.K. Correspondent, 10/26/99 6 Bloomberg UK – www.bloomberg.co.uk Directory: documents -> 2963149 -> 3508563 documents -> Concept stage documents -> The great global switch-off documents -> Nonprofit grant application documents -> The Truth about the Rwandan Genocide documents -> Annual InStructional unit plan documents -> Chaos equipment included 3508563 -> “Amazon can be one of the most successful companies all over the world. Risks are big, but profitability can be also big” Download 210.94 Kb. Share with your friends:
|
1 2