ARM

CSR

WLF

A profit warning from the Finnish mobile giant chilled chip designers

by Russ Mould

A shock profit warning from mobile phone giant Nokia punctured a rally in chip design stocks ARM (ARM), CSR (CSR) and Wolfson (WLF) late last week. Continued dollar strength will support the trio but investors should look to lock in profits at CSR and Wolfson in particular.

Although Nokia cited fierce price pressure in low-end phones and market share loss as reasons for its alert, the Finnish firm also shaved its 2008 global mobile handset growth forecast to 10% from over 10%.

This may not seem much but ARM generates around 70% of its royalty income from mobile phones. When Shares (The Griller, 24 July) interviewed the Cambridge firm’s chief financial officer Tim Score he was keen to emphasise how ARM is diversifying its revenue streams. ‘In the last four quarters, 80% of licences have been for non-mobile applications as first use. The idea the company is totally at the mercy of Nokia’s handset unit sales is getting a bit passé, really’ he argued. Third-quarter results due on 28 October will be an early test of this.

ARM’s February profit warning did at least set a sensibly low level of expectations for this year and 2008 price/earnings ratios of 11.2 and 11.8 for CSR and Wolfson respectively also price in a lot of bad news. Yet CSR has to face rising competition in Bluetooth from Broadcom, and Wolfson has just appointed its third chief executive in two years after Dave Shrigley’s surprise decision to step down as of January 2009. Edinburgh’s Wolfson also has to cope with the loss of a key MP3 player design slot with an unnamed major customer, widely thought to be Apple.

Shares says:

Hold ARM

Sell CSR, Wolfson