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How ARM Holdings plc (ADR) (ARMH) Measures Up as a GARP Investment

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ARM Holdings plc (ADR)LONDON — A popular way to dig out reasonably priced stocks with robust growth potential is through the “Growth at a Reasonable Price,” or GARP, strategy. This theory uses the P/E-to-growth ratio to show how a share’s price measures up in relation to its near-term growth prospects — a reading below one is generally considered decent value for money.

Today I am looking at ARM Holdings plc (ADR) (NASDAQ:ARMH) to see how whether it makes a good GARP share.

What are ARM Holdings’ earnings expected to do?

2013 2014
EPS growth 37% 24%
P/E ratio 47.7 38.6
PEG ratio 1.3 1.6

Source: Digital Look.

ARM Holdings plc (ADR) (NASDAQ:ARMH) has posted chunky earnings-per-share growth in each of the last three years, and City analysts expect this to remain the trend for both this year and next.

The semiconductor specialists carry a PEG ratio of more than one for 2013 and 2014, while its P/E readout for this period is also massively higher than a classification of 10. A reading below this figure is generally considered excellent value for money.

Does ARM Holdings provide decent value against its rivals?

FTSE 100 Technology Hardware and Equipment
Prospective P/E Ratio 17.1 24.5
Prospective PEG ratio 4.8 0.7

Source: Digital Look.

ARM Holdings plc (ADR) (NASDAQ:ARMH) beats the FTSE 100 in terms of prospective PEG ratio — the ultimate GARP metric — although it does fall behind the index when comparing its P/E rating. Meanwhile, the company significantly lags its sector peers on both counts. Indeed, its rivals can be considered classic growth selections with an average PEG projection of less than one.

In my opinion, ARM Holdings plc (ADR) (NASDAQ:ARMH)’ stratospheric share-price rise in recent years — prices have leapt 95% in the past year alone — has left the company looking excessively expensive in relation to its growth prospects and in severe danger of a price collapse.

Promising, if overpriced

ARM Holdings plc (ADR) (NASDAQ:ARMH) is undoubtedly a massive player in the creation of semiconductors. The company — which generates revenue through creating and licensing intellectual property — has seen profit surge in recent years, owing to the explosion in smartphone and tablet PC demand, for which it is a key component-builder for many of the world’s largest manufacturers.

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