Broker tips: ARM, Cairn, ASOS

26th Oct 2010 12:57

KBC Peel Hunt thinks the rating of high-flying ARM Holdings is vulnerable to a correction and recommends its clients take profits on the stock.Although the chip designer has benefited from the explosive growth of the smartphone market, the broker believes that the rating "is now well ahead of itself."The group released a strong trading update for the third quarter, with sales around 7% ahead of forecasts at $158m. Normalised pre-tax profit and earnings per share came in at £39m and 2.08p respectively, slightly ahead of consensus, and the broker notes that "this was a strong performance in what is normally the weakest quarter of the year." Despite impressive sales and a strong-looking backlog, the broker expects royalty growth to slow sharply next year to the 10-15% range, down from 30% in the third quarter, and without profit upgrades Morland sees the rating as vulnerable.Peel Hunt expects earnings per share to grow at around 20% per annum over the next two to three years, but during that period the company is likely to have some weaker quarters, and when that happens the share price correction "could be severe", Morland reckons."We maintain our Sell rating despite ARM's dominant global position in a high growth market". The target price is unchanged at 320p.Broker finnCap has lowered its target price for Cairn Energy following a disappointing operational update concerning its Greenland exploration programme.The oil group revealed Tuesday that drilling on Alpha-1S1 ceased at the end of September and that no commercial discovery had been made in its Greenland exploration programme at the T8-1 and T4-1 wells.The T4-1 well in the northern area of the Sigguk licence failed to encounter hydrocarbons and found only thin reservoir sands. The broker sees this as significant as it may "indicate that the prospectivity in the tertiary play is limited across the whole of the basin, although deeper potential remains untested."FinCap analyst Will Amstein has removed the T4 and Alpha prospects from is net asset value calculation, which falls by 46.4p to 397.3p per share and now includes nothing for Greenland.The target price is cut to 400p following this net asset value downgrade "but our rating remains at Hold as the shares are already off 10-15% from highs in August and the 400p levels is underpinned by its stake in Cairn India", Amstein said."The company will also announce its forward exploration programme in the first quarter in 2011, which may reignite investor interest in the stock."Panmure Gordon has cranked up its target price for ASOS anticipating a strong Christmas trading period for the fast growing online clothes retailer. .Analyst Jean Roche highlights a number of "reasons to be cheerful" about ASOS'ss prospects.Firstly, UK online fashion sales growth accelerated in September, up 24% from August and 28% from last September."Recent marked acceleration in online traffic from the US, Germany and France bodes very well for the next several quarters", Roche said. The US web site is now live, while the French and German web sites are due to switch on before the end of this month.Secondly, "ASOS continues to hold second place in the most recent UK online fashion market 'charts' as compiled by Experian/Hitwise," Roche notes.The broker has also learned that the River Island chain, which is Britain's third most visited fashion web site, has agreed to allow ASOS to start selling River Island product. This, Roche thinks, is something of a coup for ASOS as River Island does not distribute via any other retailers.Recent popularity of the ASOS own brand in the US also has the potential to significantly increase profitability. Roche notes that the US venture has seen substantially better gross margins offered by own brand products as opposed to one of the 900 plus other brands sold by ASOS.The broker's price target for the stock has been raised to 1616p from 1223p.