FTSE 100 falters as oil falls, but chip designer Arm beats expectations

Discussion in 'Market News' started by Lily, Apr 20, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
    Likes Received:
    Apple supplier upbeat, while mining shares regain ground after early falls

    Leading shares have slipped back after hitting new four month highs on Tuesday, hit by a drop in crude prices now the Kuwait oil strike is over, prompting renewed fears of oversupply amid falling demand.

    A slump in the Chinese market on fears of a clampdown by the authorities on excessive borrowing has not helped sentiment.

    The outlook is intact, underpinned by a strong licences pipeline and continued shift to a higher royalty rate mix, yet valuation remains at the lower end of the historic range. This we believe supports our positive investment view based on the long-term attraction of Arm’s business model and underpinned cash generation in the many years ahead. We retain our buy and a 1200p 2020 royalty driven target price.

    Don’t expect much change to consensus estimates for 2016 - sterling revenue may nudge up (weaker pound) and operating expenditure is also likely to increase broadly offsetting each other.

    Hard to call the stock today. Typically sentiment towards Arm has been driven by royalty momentum which is soft. However the stock has been weak into results.

    The rally during the first quarter of 2016 caught many observers off-guard, ourselves included. Fundamentals in China have mildly improved, but not to the extent that equity price moves can be fully justified. The rally can largely be explained by dollar weakness and improved sentiment on the China growth outlook - hence we expect commodity prices to be primarily driven by these factors in the near term...

    [We have] a mild positive bias toward the sector, although we caution that the industry still faces some serious challenges: primarily on-going balance sheet concerns. Our recommendation is to buy whenever prices dip below value points. The bottom of the market appears to have been tested and found, but we do not see this as the beginning of a renewed bull market.

    BT’s outlook appears increasingly uncertain, with more elements outside management control. The positive view we established in 2010 was founded on benign regulation (helping BT regain consumer retail momentum) and substantial cost-cutting. With neither support looking so reliable now and valuation no longer cheap, we downgrade to hold.

    N Brown’s transformation programme is now two years in and our forecast pretax profit for next year sits 20% below where we started from. The scale of investment and change required has been significant, arguably greater than management or the market realised two years ago. However, as we downgrade forecasts again, we have little confidence that the business will show meaningful traction and we cut to reduce [from hold] noting better recovery opportunities elsewhere.

    Full year results are in line, but trading weakened significantly in the tail end of the year and has remained weak, with sales declines to date in the new financial year. While management is confident that some of the trading weakness can normalise, it is clear that market conditions are tough. This is further reflected in guidance of a significant product gross margin decline for 2017, impacted by foreign exchange and the need to invest in price to gain share. Systems investments are on track but will see big changes this year and management warns of potential “bumps in the road”. While the shares are not expensive and could well fall in line with earnings downgrades today, we think they fairly reflect the balance of risks and hence we retain a hold recommendation.

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