Broker tips: ARM, Next, Drax

4th Aug 2010 12:35

With directors of ARM Holdings cashing in some of their shares KBC Peel Hunt has asked the question whether other holders of the chip designer's shares should do likewise."Recent performance has been reminiscent of 1999, and the high valuation, combined with limited scope for upgrades and a weakening dollar, leads us to move from Buy to Hold," KBC analyst Paul Morland announced.Morland argues that the company's share price has been lifted by strong demand for the sort of electronic gadgets that use ARM's chip designs and also by the "the strong performance of many of ARM's customers, who themselves supply the device makers."That smacks of double counting to Morland."While valuation has not proved a hindrance to the shares so far, a year three P/E [price/earnings ratio] of almost 30x cannot be ignored, as it might have been in 1999," Morland warns.Fashion retailer Next spent most of the morning at the bottom of the FTSE 100 league table on the day it announced a cautious trading update, and this could present a buying opportunity, Charles Stanley states."Given our expectation that the group will deliver at least high single-digit EPS growth in each of the next three years, we consider the valuation very attractive and re-iterate our Accumulate recommendation," said Charles Stanley analyst Sam Hart.The broker is leaving its 2011 profit before tax and earnings per share estimates unchanged at £555m and 214p respectively, and is also standing pat on its 2012 estmates (£590m and 235p respectively)."The consumer environment is expected to remain subdued going forward, reflecting proposed government spending cuts and tax increases. Demand, however, should remain relatively resilient, given that we believe unemployment is very close to its peak (or may even have already peaked) and anticipate only very modest interest rate increases in 2011. In such an environment, we expect Next to continue to make good progress," Hart said.Results from coal-fired power plant operator Drax provided little impetus for analysts to alter full-year forecasts, though Nomura Securities has trimmed its earnings per share estimate by 3%.The broker noted that the commodity outlook has changed little since it upgraded the stock to "neutral" in mid-June and things have not really moved on either in terms of Drax's plans to move to a greener platform through the conversion of one or more plants to using biomass."We suggest that Drax will only commit to dedicated new-build and/or conversion once the value proposition can be proved. Investors could hold the stock for yield in the intervening period," Nomura analyst John Musk suggests. The stock is yielding more than 4% based on historical payments or 7.8% on the projected pay out for the whole of 2010."With new 50% payout now effective and relatively secure EPS (fully hedged for 2010 and 70% for 2011), we see a yield of almost 15% over two years," Musk predicts.The company said regulatory uncertainty means development work for first dedicated biomass plant will continue into 2011 before the investment case can be proven. Nomura expects Drax to "campaign hard for a framework that allows conversion of one unit (with others to follow) from coal to biomass and expect this to be value enhancing," though the enhanced valued is not included in the broker's base valuation of 425p per share.