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ARM Holdings plc (ADR) (ARMH): What Should You Do?

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LONDON — I’m always searching for shares that can help ordinary investors like you make money from the stock market.

Right now I am trawling through the FTSE 100 (INDEXFTSE:UKX) and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: Low levels of debt and other liabilities;

2. Profitability: Consistent earnings and high profit margins;

3. Management: Competent executives creating shareholder value;

4. Long-term prospects: A solid competitive position and respectable growth prospects.

5. Valuation: An underrated share price.

ARM Holdings plc (ADR) (NASDAQ:ARMH)

A look at ARM
Today I’m evaluating ARM Holdings plc (ADR) (NASDAQ:ARMH), the world’s leading semiconductor Intel Corporation (NASDAQ:INTC) lectual property supplier, which currently trades at 1,066 pence. Here are my thoughts:

1. Financial strength: ARM Holdings plc (ADR) (NASDAQ:ARMH) is in excellent financial health, with a net cash position of 381 million pounds and over 1 billion pounds of free cash flow generated during the last five years.

2. Profitability: ARM Holdings plc (ADR) (NASDAQ:ARMH) has grown rapidly over the past 10 years. Revenues have increased more than three-fold and operating profits 11-fold, while adjusted-earnings per share have grown nine times from 1.7 pence in 2003 to 14.5 pence in 2012 and dividends per share eight times from 0.6 pence in 2003 to 4.5 pence in 2012. Operating margin has ranged from 15%-20% for most of the decade and has risen the last few years from 26% in 2010 to 30% in 2011 to 36% in 2012. The 10-year average return on capital employed has been excellent at 36%.

3. Management: Warren East has been ARM Holdings plc (ADR) (NASDAQ:ARMH)’s CEO since 2001, successfully steering ARM from a small stalwart earlier in the decade to the dominant mobile-chip maker it is today. He recently announced his retirement and Simon Segars, the company’s president, will take over on July 1.

4. Long-term prospects: Instead of manufacturing its own CPUs, ARM Holdings plc (ADR) (NASDAQ:ARMH) develops processor and other technology designs that it licenses to other companies for a one-off licence fee while also receiving royalty payments for every ARM-based chip sold by the licencee. ARM’s chips go into a wide range of mobile, consumer and embedded products such as mobile handsets, tablets, laptops, digital cameras and modems. Due to its low-power and battery-saving features, it is the chip of choice for a majority of mobile devices.

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