Near-Term, Neutral on ARM Holdings
ARM Holdings (ARMHY) is the leading IP provider of RISC microprocessors that are embedded in OEM [original equipment manufacturer] products. December top and bottom-line results were below consensus estimates.
Over the past year, royalty sales from the recently acquired Artisan fell short of expectations, but the license model has begun to drive growth and should be a positive long-term story. We see limited near-term share appreciation due to managements muted guidance for the quarter ahead. The premium paid for Artisan, and the uncertainty regarding synergies are still concerns for investors to consider. We continue to rate shares of ARMHY a Hold.
Currently, the stock is trading at an 18.2x P/E multiple of our projected 2008 EPADS. ARM's projected earnings growth is at the lower end of the peer group range. Furthermore, the company has seen a lack of revenue growth over the past several quarters. However, it appears that the semiconductor cycle troughed in the first quarter of 2005, as foundries have experienced a steadily rising utilization rates.
Integration uncertainty and the premium paid for the Artisan merger are additional concerns. We believe that the stock will continue to trade around the current valuation metrics. We reiterate our Hold recommendation, with a six-month target price of $7.00 based on 20.0X our 2008 EPADS estimate.
American Electric Stays a Hold
Consistent performance at the East Regulated Segment, new 765-KV transmission lines at PJM, ongoing debt reduction, new power supply contracts in ERCOT, and the favorable approval of rate changes from the PUCO and PUCT are expected to drive modest earnings growth at American Electric Power Company, Inc. (AEP) over the near-term. However, the unfavorable order on Appalachian Power's base-rate filing, higher operating and maintenance expenses and uncertainty surrounding pending regulatory cases collectively continue to weigh on the stock.
Going forward, AEP offers investors stable underlying core utility earnings, although with only modest growth potential. As of this report, AEP common stock trades at 13.4x our current-year 2008 operating earnings per share estimate and 12.8x our forward 2009 EPS estimate, or at a moderate discount to the P/E multiple range of comparable diversified energy utilities and the broader electric power utility industry.
However, the stock's recently increased $1.64 per share annual cash dividend may appeal to conservative income-seeking investors as it currently yields slightly above the utility industry average at 3.8%. Accordingly, with a mildly bullish outlook, modest earnings growth and an attractive dividend yield, we maintain our market-neutral Hold recommendation on AEP common stock with a six-month target price of $45, or 14x and 13.4x, respectively, our 2008 and 2009 EPS estimates. Price appreciation to our near-term valuation target, coupled with the stock's recently-increased $0.41 per share quarterly cash dividend which we deem sustainable and secure given reasonable projected earnings payouts of 51% and 49%, respectively, of our 2008 and 2009 EPS estimates represents annualized total return potential of 14.1%.
Better Brazil Telcos Than Telesp
We are keeping our Hold recommendation on Telecomunicações de Sao Paulo S.A. or Telesp (TSP). Telesp has been growing in its broadband business, and the Pay TV segment is quite encouraging. The company is well run, has an extremely high dividend yield, and a decent operating margin.
However, the core wireline business has stagnated and competition has been increasing. Also, Telesp's current valuation is not particularly attractive if compared to other Brazilian operators like Tele Norte Leste Participações, or Telemar (TNE) and Brasil Telecom Participações S.A. or Brasil Telecom (BRP).
Recently, Telesp released results for the fourth quarter 2007 in line with our expectation. Net revenues reached R$3,737 million (US$1,884 million), a decrease of 0.8% year-over-year. The wireline segment reached 11.97 million lines in service, with a reduction of 0.5% year-over-year. During 2007, broadband subscribers' base reached 2,053 million, representing a 27.75% growth from the end of 2006 and a 6% increase from the previous quarter.
