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KLA-Tencor Corporation Analysis – September 2015 Update $KLAC

Benjamin 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 or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – August 2015.  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 stock analysis showing a specific look at how KLA-Tencor Corporation (KLAC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): KLA-Tencor Corporation (KLA-Tencor) is a supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industries. KLA-Tencor is engaged in the design, manufacture and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries, and provides a comprehensive portfolio of defect inspection and metrology products, and related service, software and other offerings. The semiconductor industry is KLA-Tencor’s core focus. The Company’s products are used in a number of high technology industries, including the light emitting diode (LED) and data storage industries, as well as general materials research. Within its primary area of focus, the Company’s portfolio includes defect inspection and metrology products, and related service, software and other offerings, which helps integrated circuit (IC or chip) manufacturers manage yield throughout the entire semiconductor fabrication process.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of KLAC – August 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end Pass
6. Moderate PEmg Ratio PEmg < 20 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $2.97
MG Growth Estimate 1.55%
MG Value $34.45
Opinion Overvalued
MG Value based on 3% Growth $43.04
MG Value based on 0% Growth $25.23
Market Implied Growth Rate 3.83%
Current Price $47.98
% of Intrinsic Value 139.26%

KLA-Tencor Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the high PB ratio.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.69 in 2012 to an estimated $2.97 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 3.83% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the 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 Corporation (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.

Stage 3: Information for Further Research

KLAC Charts August 2015

Net Current Asset Value (NCAV) -$3.12
Graham Number $13.01
PEmg 16.17
Current Ratio 3.90
PB Ratio 18.22
Dividend Yield 4.17%
Number of Consecutive Years of Dividend Growth 6

 

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Useful Links:

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GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Total Current Assets $3,904,576,000
Total Current Liabilities $1,001,763,000
Long-Term Debt $3,173,435,000
Total Assets $4,826,012,000
Intangible Assets $347,158,000
Total Liabilities $4,404,573,000
Shares Outstanding (Diluted Average) 160,014,000

Earnings Per Share History

Next Fiscal Year Estimate $2.86
Jun15 $2.24
Jun14 $3.47
Jun13 $3.21
Jun12 $4.44
Jun11 $4.66
Jun10 $1.23
Jun09 -$3.07
Jun08 $1.95
Jun07 $2.61
Jun06 $1.86
Jun05 $2.21
Jun04 $1.05
Jun03 $0.48
Jun02 $1.10
Jun01 $0.34
Jun00 $1.32
Jun99 $0.21
Jun98 $0.76
Jun97 $0.62
Jun96 $1.17

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.97
Jun15 $3.22
Jun14 $3.60
Jun13 $3.15
Jun12 $2.69
Jun11 $1.70
Jun10 $0.45
Jun09 $0.41
Jun08 $2.08
Jun07 $1.98
Jun06 $1.56
Jun05 $1.28
Jun04 $0.83
Jun03 $0.71
Jun02 $0.80
Jun01 $0.65
Jun00 $0.81

Recommended Reading:

Other ModernGraham posts about the company

10 Undervalued Companies for the Enterprising Dividend Stock Investor – August 2015
5 Undervalued Companies for Enterprising Investors With High Dividend Yields – July 2015
5 Undervalued Companies for Enterprising Investors With High Dividend Yields – June 2015
5 Undervalued Companies for Enterprising Investors Near 52 Week Lows – June 2015
The 8 Best Stocks For Value Investors This Week – 6/6/15

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Applied Materials Inc. Analysis – August 2015 Update $AMAT

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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