Sell over-priced ARM

Healthier outlook at Goldshield; Thin margins make Dawson a hold

Two months after its devastating profits warning, should ARM Holdings be back on investors' shopping lists?

Yes, reckon the technology analysts at Merrill Lynch who upped their recommendation on the chip designer to a "buy" yesterday. Yes, reckoned the market players who chased ARM shares up 5p to close at 72.5p in heavy trading.

Merrill argued that more mobile phones will be sold next year than they previously expected, and that means more royalties for ARM since the majority of the world's mobiles contain the company's technology. The broker is predicting handset sales of 474 million globally for 2003, up from their previous estimate of 410 million. That would mean £6m more than previously expected for ARM.

Certainly ARM's share price has been benefiting from expectations that mobile phone sales will improve next year. Other positive brokers reckon Nokia will make upbeat noises on the handset market over the coming two weeks.

But surely this misses the point. The bulk of ARM's revenue comes from licensing technology to customers, not royalties on sales of handsets.

And the same problems which caused ARM to issue a profits warning – mainly that tough market conditions meant customers were taking longer to sign those licensing deals – have not gone away. ARM has said it expects revenues to be "flattish" for the foreseeable future.

The shares are still well below the 125p at which they traded before the October profits warning. There again, they have already nearly doubled from the 40.5p trough they reached shortly after.

Analysts reckon the company will produce earnings of about 3.2p this year, falling to 2.1p next. In other words, the stock trades on a rating of 23 times for 2002, which balloons to 35 times the 2003 number.

The company was once able to sustain that sort of toppy rating because of its reputation for exceeding forecasts. Not any more. Last month's warning showed ARM is not immune to market conditions, which have not improved dramatically in the space of eight weeks. The shares are simply too expensive. Sell into further strength.

Healthier outlook at Goldshield

An overdose of problems at Goldshield. So far this year the drugs seller has been raided by the Serious Fraud Office over allegations of price fixing of a heart drug. The Royal Mail has ended trade discounts for shipping Goldshield's mail order vitamins. The vitamins market has slumped after criticism of their effectiveness. And, worst of all, one of Goldshield's drugs manufacturers, Miza, has got into financial difficulties, leaving it with a serious supply headache.

Goldshield made the wrong choice in trying to help Miza trade its way out of its financial problems by paying over the odds for products and buying more than it really needed. It says it was worried about damage to its reputation. At last, it has pulled the plug, and also abandoned a plan to buy Miza outright, because Goldshield has no manufacturing experience. The débâcle has blotted the copybook of Ajit Patel, the founder and executive chairman. At least it looks as if manufacturing will soon be transferred to a new supplier and Goldshield can start to work its expensive supplies through the system.

Interim profit fell 3 per cent to £7.1m and the second half will be tough, too. But turnover continues to grow as it expands the US mail order business, and its new UK cable channel (a sort of QVC for pills) will help, too. A new back office operation in low-cost India will mean future growth can be managed more cheaply.

The fraud case threat is real, but small, since the group's interest in the markets under investigation was only modest. It is high risk, but worth betting that Goldshield's luck will improve. At 370p (down 22.5p yesterday), the shares are on 8 times the Numis forecast of pre-goodwill earnings and are a buy.

Thin margins make Dawson a hold

The national appetite for celebrity tittle-tattle has been very helpful for Dawson. The newspaper and magazines distributor – the UK's largest after WH Smith and John Menzies – has been able to pick itself up after a miserable few years in part because of the demand for gossip mags.

Yesterday's return to profit was hard won. The group turned last year's £700,000 loss into a pre-tax gain of £6m for the year to 28 September.

On the downside its sideline in distributing mobile phone top-up cards is in decline. And its holiday brochures business was knocked by the cutbacks after 11 September. But the World Cup generated plenty of one-off publications. And the management has pulled off what it calls "extreme re-engineering" of the group.

What that means is that there are 10 per cent fewer people working for the group than a year ago, and the property portfolio has been reorganised, while the debts and interest bill have been brought fully under control.

An end to the national newspaper price wars should improve sales, while the book distribution business is winning new orders from universities in the UK and has also begun to make gains in Europe. There was also comfort given yesterday that the holiday brochure business is back to normal this year.

Dawson shares, up 3p to 95.5p, trade on a modest 8 times Seymour Pierce's estimates of current-year earnings, which seems right for a group with large overheads and wafer-thin margins. Hold.