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| Image: KLA Tencor |
With a yield management products being an almost must have for its customers, is KLAC currently cheap to buy, or is capex going to slip leading to a deflated stock price for KLAC?
Disclosure: I have no holdings in KLAC currently.
KLA Tencor Corp (NASDAQ: KLAC)
2 Jul 11
KLAC’s FY11 ends 30Jun11.
P=41.45
EPS_4qf_adj=1.28-1.44
EPS_ytd=3.23
EPS_11f=4.51-4.67
PER_11f=8.9-9.2x
EPS_ttm=3.89
PER_ttm=10.7x
Div_ttm=1.0
Div yield_ttm=2.4%
KLAC is a supplier to the semi-conductor industry, with yield management and process control solutions. Their revenues are closely related to the capex of the foundries, and its main bulk of revenues come from these, even though they are also involved in other industries creating silicon wafers like solar and tv.
KLAC’s Greenblatt ratios from 2010 is not good, with ROCE=11% and EY=4.4%. But using ttm data, the ratios are now at a solid ROCE=28% and EY=12.9%, which is very respectable. 2011 is working out to be an excellent year for KLAC in earnings, and if their 4q forecasts hold, it would be a record year, and about 4x 2010 earnings.
What differentiates KLAC from other semi-con industry related plays is that it is almost consistently profitable. KLAC has in the last 10 years only 1 unprofitable year, in 2009. In contrast, companies like AMAT rides the economic cycles, leading to losses at the troughs of the cycles (even though AMAT was also unprofitable in 2009 only for the last 10years). KLAC is likewise exposed to these cycles, but its current backlog exceeds 1B. Indeed AMAT is listed as a competitor. KLAC has more than 10% of its revenue coming from Intel and TSMC in 2010. According to S&P, KLAC has market leading position. In terms of its products, the long term story of more as opposed to less chips, and more different types of chips, is set to grow. The continual investments required as technologies improve also would create a recurrent demand for KLAC’s products. And its product range is also growing for the peripheral technologies that require yield control. KLAC’s balance sheet is strong, with about 10$/share worth of marketable assets and cash equivalents. This positions it well for future acquisitions.
In terms of FCF, KLAC’s 2011 extrapolated data indicates it is currently priced for a 4.5% LTEG. The reason why FCF is not favourable is due to its high beta of 1.76 and its 90% weight of equity, leading to a high WACC. If what they categorised as marketable securities is added to the value of the firm (the previous calculation was more conservative, only recognising cash and cash equivalents), it is currently priced for 2.5%. That still leaves FV=32.92 or 21.5% lower than current price.
Ratios: Considering its record year this year, KLAC is currently priced at PERs which is its lowest in the last 10 years. However, this is on the back of records earnings, which the market is interpreting to come to an end, given its current pricing.
The risks that KLAC faces is double dip, whereby capex would be slashed and KLAC’s profits would be badly impacted. This scenario appears unlikely. In fact, it is at the high end of its earnings cycle, with EPS levelling off as opposed to crashing. In terms of price performance, it has just rebounded off its YTD base, and is now 8.8% off its ytd low of 38.1.
KLAC is a GARP stock as opposed to value. It also contains elements of a directional play, since its earnings are not defensive. Indeed the Greenblatt ratios did capture that KLAC is a rather special company, with good ROCE and EY, but FCF shows it is not priced that conservatively, and also that the market is reading that earnings would fall subsequently.
Conclusion: Review at P=33. That would be a safe point to enter something like KLAC.
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