The Expert View: ARM Holdings, Inchcape and Rentokil

Our daily round-up of analyst recommendations and commentary, featuring ARM Holdings, Inchcape, Rentokil, JD Wetherspoon and Mothercare.

Key stats
Market capitalisation	£12,900m
No. of shares out	1,381m
No. of shares floating	1,369m
No. of common shareholders	not stated
No. of employees	2261
Trading volume (10 day avg.)	4m
Turnover	£577m
Profit before tax	£161m
Earnings per share	11.51p
Cashflow per share	12.76p
Cash per share	27.98p

*Correct as at 15 Mar 2013

'Internet of Things' to propel ARM Holdings

Four fundamental shifts in the IT world should see ARM Holdings (ARM.L) become an increasingly prominent chipmaker, according to Jeffries analyst Lee Simpson, who has upgraded the shares from 'hold' to 'buy'.

According to Simpson, the critical areas for ARM are:

1. Mobile computing: ARM’s low-power architecture is a big plus in this space. 'We are becoming increasingly intrigued by the possibility that all the investment across the IT ecosystem will be more concentrated in mobile and datacentres over much of the rest of this decade,' Simpson said.
2. Datacentres: ARM's potential in this sector remains a few years off, but again its strength in low-power systems holds promise.
3. Networking: Here Simpson believes ARM has potential in both the home networking and the enterprise sectors. 'Nowadays, mobile network vendors are now seeking higher perfromance within a constrained power budget,' he said.
4. Internet of Things: This term refers to equipping physical objects with tiny identifying devices (such as RFID tags) and organising them in an internet-like structure. 'We expect another 20 billion microcontrollers, sensors and low power connectivity devices as a result of the growth of the Internet of Things,' Simpson said.

Shares in the group closed at 942p on Friday, up 20p or 2%.

Key stats
Market capitalisation	£2,385m
No. of shares out	466m
No. of shares floating	425m
No. of common shareholders	not stated
No. of employees	13854
Trading volume (10 day avg.)	1m
Turnover	£6,085m
Profit before tax	£185m
Earnings per share	39.41p
Cashflow per share	47.80p
Cash per share	128.46p

*Correct as at 15 Mar 2013

UBS downgrades Inchcape

Car dealership Inchcape (INCH.L) still has long-term growth potential, according to UBS analyst Catriona O'Grady, but the re-rating of the shares over the past few months coupled with a 'temporary deceleration' has spurred the analyst to downgrade the shares.

O'Grady previously had a 'neutral' stance on Inchcape, praising its double-digit growth in earnings per share and pre-tax profit last year. However, she's downgraded to 'sell' following a more than 15% rise in the shares over the past three months.

Margin pressure at home and in emerging markets is also a concern for the analyst: 'We believe the outlook for 2013 is mixed with continued weakness expected in the emerging markets,' she said. 'We forecast a 10 basis point fall in emerging markets margins across 2013 with H2 year-on-year performance stronger than H1. Negative margin pressure is also expected to offset volume growth in the UK.'

Shares in the group closed at 510.7p on Friday, down 6.7p or 1.3%.

Key stats
Market capitalisation	£1,808m
No. of shares out	1,809m
No. of shares floating	1,790m
No. of common shareholders	not stated
No. of employees	66470
Trading volume (10 day avg.)	3m
Turnover	£2,544m
Profit before tax	£-70m
Earnings per share	-3.84p
Cashflow per share	10.18p
Cash per share	4.27p

*Correct as at 15 Mar 2013

Canaccord unimpressed by forecast-beating Rentokil

Many-armed commercial services group Rentokil (RTO.L)'s fourth quarter results came in ahead of Canaccord analyst James Gilbert's predictions, but he still says the shares are a 'sell'.

Adjusted pre-tax profits of £64.4 million were 4% ahead of Gilbert's £61.7 million estimate, and comfortably above the £59.2 million consensus estimate.

Gilbert said the beat in the results wasn't all it might seem on first glance. 'We view the beat as low quality given the materiality of reorganisation and one-off costs in the fourth quarter,' he said. 'These totalled 41% of adjusted pre-tax profit in the fourth quarter, 28% for 2012 as a whole and averaged about 16% of pre-tax profit 2007-2011.

'At the same time fourth quarter portfolio trends provide little encouragement for a meaningful pick-up in organic growth in 2013 with new business/additions (£64.4 million) below terminations/reductions (£74.7 million).'

Shares in the group closed at 99.9p on Friday, up 9.5p or 10.5%.

Key stats
Market capitalisation	£635m
No. of shares out	126m
No. of shares floating	86m
No. of common shareholders	not stated
No. of employees	14403
Trading volume (10 day avg.)	0m
Turnover	£1,197m
Profit before tax	£45m
Earnings per share	35.63p
Cashflow per share	74.68p
Cash per share	22.25p

*Correct as at 15 Mar 2013

JD Wetherspoon beats forecasts

Pubco JD Wetherspoon (JDW.L)'s half-yearly results came in ahead of Shore capital analyst Greg Johnson's forecasts, but he still believe other players in the sector offer a better deal for investors.

In the 26 weeks to 27 January revenues rose 10% year-on-year to £626.4 million, like-for-like (LFL) sales were up 6.9%, and pre-tax profit fell 2.7% to £34.8 million. The LFL figure was ahead of Johnson's estimate, aided by strong food sales.

'Following today’s H1 results we are upping our 2013 pre-tax profit estimate by £1 million to £71 million (earnings per share: 41p),' Johnson noted.

However, Johnson still perfers other pubcos: 'We have a hold stance on the stock seeing better returns elsewhere in the sector, including Marston’s (MARS: Buy at 142p), Greene King (GNK: Buy at 710p) and Spirit (SPRT: Buy at 67p).'

Shares in the group closed at 515.5p on Friday, up 5.5p or 1%.

Key stats
Market capitalisation	£257m
No. of shares out	89m
No. of shares floating	86m
No. of common shareholders	not stated
No. of employees	4350
Trading volume (10 day avg.)	0m
Turnover	£813m
Profit before tax	£-92m
Earnings per share	-105.28p
Cashflow per share	-79.13p
Cash per share	2.03p

*Correct as at 15 Mar 2013

Mothercare's UK tribulations to continue, Cantor Fitzgerald warns

Mothercare (MTC.L)'s fourth-quarter update on 11 April is likely to show little progress, according to Cantor Fitzgerald analyst Kate Calvert.

'Ten months into his stewardship as CEO and while Simon Calver has had an active time, we expect little progress to be seen from the financial numbers when its Q4 trading update is announced,' Calvert said.

'Given the scale of the task ahead, we believe the repositioning of Mothercare could take longer than the three years Transformation and Growth plan.'

Fierce competition from online rivals and the food retailers remain a major problem for Mothercare, she added. 'On our forecast, the UK is expected to remain unprofitable for the next three years. We maintain our sell recommendation.'

Shares in the group closed at 294.3p on Friday, up 3p or 1%.