KLA-Tencor Corp (KLAC) Quarterly Valuation – April 2014

KLA_logolockup_RGBBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how KLA-Tencor Corp fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): KLA-Tencor Corporation (KLA-Tencor) is engaged in the design, manufacture and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries. KLA-Tencor’s offerings include the Chip Manufacturing, Wafer Manufacturing, Reticle Manufacturing, Complementary Metal-Oxide-Semiconductor (CMOS) Image Sensors Manufacturing, Solar Manufacturing, light emitting diode (LED) Manufacturing, Data Storage Media/Head Manufacturing, Microelectromechanical Systems (MEMS) Manufacturing, and General Purpose/Lab Applications. It also provides refurbished KLA-Tencor tools as part of its K-T Certified program for customers manufacturing larger design-rule devices, as well as service and support for its products. The Company’s products are used in a number of other industries, including the LED, data storage and photovoltaic industries, as well as general materials research.

KLAC Chart

KLAC data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $68.03
MG Value $140.68
MG Opinion Undervalued
Value Based on 3% Growth $52.98
Value Based on 0% Growth $31.06
Market Implied Growth Rate 5.06%
Net Current Asset Value (NCAV) $15.71
PEmg 18.62
Current Ratio 4.86
PB Ratio 3.19

Balance Sheet – 12/31/2013

Current Assets $4,507,500,000
Current Liabilities $928,000,000
Total Debt $747,600,000
Total Assets $5,440,700,000
Intangible Assets $352,700,000
Total Liabilities $1,890,500,000
Outstanding Shares 166,580,000

Earnings Per Share

2014 (estimate) $3.62
2013 $3.21
2012 $4.44
2011 $4.66
2010 $1.23
2009 -$3.07
2008 $1.95
2007 $2.61
2006 $1.86
2005 $2.32
2004 $1.21

Earnings Per Share – ModernGraham

2014 (estimate) $3.65
2013 $3.15
2012 $2.69
2011 $1.70
2010 $0.45
2009 $0.42

Dividend History

KLAC Dividend Chart

KLAC Dividend data by YCharts

Conclusion:

KLA-Tencor is a very intriguing company for the Enterprising Investor, but is not suitable for the Defensive Investor.  The company has shown insufficient earnings stability and trades at a PB ratio too high for the Defensive Investor; however, the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors should feel very comfortable proceeding with further research into the company as well as other opportunities through a review of 5 Low PEmg Companies for the Enterprising Investor and 5 Undervalued Companies for the Enterprising Investor.  From a valuation side of things, the company appears to be significantly undervalued after growing its EPSmg (normalized earnings) from $0.45 in 2010 to an estimated $3.65 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 5.06% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on KLA-Tencor Corp (KLAC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in KLA-Tencor Corp (KLAC) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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