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FTSE 350: Connectivity drive fuels tech hardware

Soaring demand for connected cars and devices has sparked demand for microchips and antennae
January 22, 2016

Look no further than the dwindling number of FTSE 350 technology hardware companies for evidence of the rapid pace of technological change in the sector and the sizeable risks and rewards for investors. Two years ago, CSR, Pace, Spirent Communications (SPT) and Imagination Technologies (IMG) were all members, but the first couple were acquired while the latter two dropped out after their shares plunged in value. Only Arm (ARM) and Laird (LRD) remain; both are eagerly cashing in on the 'internet of things' - a catch-all term for internet-connected cars, equipment, mobile devices and wearables.

Arm designs microchips for the likes of Apple and Samsung and collects a royalty every time its customers ship a device containing one of its chips. Its focus remains on expanding its ecosystem by signing up customers in myriad markets, as well as tapping into soaring demand for connected cars and wearable devices. The strategy should lower its reliance on any one customer and give it leeway to raise its royalty rate if required. And it could receive a boost from a weaker sterling, as around 95 per cent of its revenues are in US dollars while about half of its costs are in pounds.

Similarly, Laird has taken steps to diversify away from consumer electronics and its reliance on Apple, while deepening its foothold in the booming automotive infotainment and high-speed wireless markets. The group - which makes wireless equipment such as antennae as well as protective casings for electronic devices - recently agreed to acquire Novero, a specialist in automotive connectivity. The deal follows its takeover of LSR, which develops wireless products for commercial and light industrial markets.

 Price (p) Market cap (£m)PE (x)DY (%)1-year changeLast IC view:
ARM HOLDINGS          964                  13,546 37.10.8-5.2Hold, 918p, 13 Aug 2015
LAIRD          329                       883 15.73.88.3Buy, 402p, 03 Aug 2015

Favourites

Laird's savvy acquisitions have bolstered its growth prospects, while ongoing restructuring should boost its profitability. Those efforts should mitigate the impact of slowing iPhone sales at Apple. Moreover, its shares trade at an enticing 13 times broker Liberum's forecast earnings for the current financial year, and there's a tidy forward yield of 4 per cent.

Outsiders

Arm stands to suffer from consolidation among its customers and a significant slowdown in the premium smartphone market. Moreover, its processor licensing revenue rose just 2 per cent in dollar terms in the year to 30 September, down from compound annual growth of close to 30 per cent between 2010 and 2014. And its licensing backlog has shrunk significantly in the past two years. Given the group's weakened growth prospects, the high forward earnings rating of 28 looks increasingly unjustified.