Analysts Hike Valuations for 4 Companies

UPDATE: Our analysts have hiked their fair value estimates for ARM Holdings, Carnival, Diageo and InterContinental Hotels Group

Alanna Petroff 7 February, 2013 | 11:41AM
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This article has been updated with information about ARM Holdings.

Morningstar analysts have recently raised their fair value estimates for four large London-listed companies. Find out all the details below:

ARM Holdings (ARM)
Valuation Upgrade

ARM Holdings develops the blueprints and intellectual property that are used to design semiconductors. These semiconductors are then used in a variety of products, including smartphones and PCs.

"ARM's intellectual property is the backbone of most processors used in handsets and mobile devices today, and strong tailwinds from the shift to higher-end smartphones and tablets should bode well for ARM in the years ahead," said Morningstar analyst Brian Colello.

Colello recently raised his fair value estimate for ARM to 620p per share from 489p per share based on improved long-term growth assumptions for the firm, he said. 

"After three straight years of strong revenue growth, we expect ARM's top line to continue to grow on an upward trajectory. We project 20% growth in 2013, thanks to higher licensing fees and ongoing royalties from a variety of chipmakers and technology firms," said Colello.

However, Colello's valuation is currently well below the market price, implying that investors are paying a large premium when buying shares in this technology firm.

Carnival (CCL)
Valuation Upgrade

Carnival is the largest company in the cruise industry and operates the biggest fleet on the seas, explains Morningstar analyst Jaime Katz. 

Katz recently hiked his fair value estimate for the cruise operator to 2,705p per share. His previous estimate had been at 2,510p per share. At the time of writing, Carnival was trading at 2,571p per share.

"We think Carnival has the potential to produce strong cash flows and return cash to shareholders over the long term through share buybacks and dividends," he wrote in a recent analyst report.

Carnival operates in an "underpenetrated" market and has the ability to continue "lower[ing] costs through additional administrative consolidations," said Katz.

However, investors must also recognise the risks currently facing the company.

"In the interim, there are concerns that may affect our fair value estimate. The first is volatility in energy prices; we like that Carnival has implemented collar strategies for swings in fuel pricing," said Katz. "Second, the global political environment remains unstable. Carnival is talented at redeploying or rerouting ships as needed, but unforeseen events can lead to cruise cancellations or reschedules, which may affect near-term pricing. Third, another global economic slowdown could damp demand and pricing in an unpredictable way."

Diageo (DGE)
Valuation Upgrade

Morningstar analyst Thomas Mullarkey just hiked his fair value estimate for the spirit-maker to 1,700p per share from 1,500p per share. At the time of writing, Diageo was trading at 1,883p per share.

"Our new fair value estimate values the company at an implied 16.7 times the company's fiscal 2013 earnings, 13 times EV/EBITDA, and 5.6% free cash flow yield," stated Mullarkey in his latest analyst report. "We anticipate that the company will earn 102p per share in fiscal 2013, and during the next decade we expect the firm to organically grow revenues by almost 6% per year and EPS by roughly 8% per year."

The company has a "best-in-class product portfolio" and its "beer portfolio (which includes Guinness) is also important for the company's future growth, as its beer brands can serve as a gateway to other alcoholic beverages, such as spirits," said Mullarkey. "From our perspective, this is particularly notable in driving the company's growth aspirations in Africa."

InterContinental Hotels Group (IHG)
Valuation Upgrade

Morningstar analyst Chad Mollman has boosted his fair value estimate for the hotel operator twice in the last few months, however, he still believes the market is overvaluing the company. His current fair value estimate, 1640p per share, is roughly 250p lower than the current market price.

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To hear more analysis about Carnival's future prospects, watch the video, "Fund Managers' Favourites: Overlooked & Undervalued", which features fund manager Henry Dixon from Matterley Asset Management.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Carnival PLC1,121.00 GBX3.89Rating
Diageo PLC2,558.00 GBX-0.68Rating
InterContinental Hotels Group PLC8,264.00 GBX1.57Rating

About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.

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