Company Profile (excerpt from Reuters): KLA-Tencor Corporation (KLA-Tencor), incorporated on July 9, 1975, is a supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industries. The Company’s products are also used in a number of other high technology industries, including the light emitting diode (LED) and data storage industries, as well as general materials research. Its products and services are used by bare wafer, integrated circuit (IC), lithography reticle (reticle or mask) and disk manufacturers around the world. These customers turn to the Company for inline wafer and IC defect monitoring, review and classification; reticle defect inspection and metrology; packaging and interconnect inspection; critical dimension (CD) metrology; pattern overlay metrology; film thickness, surface topography and composition measurements; measurement of in-chamber process conditions, wafer shape and stress metrology; computational lithography tools, and overall yield and fab-wide data management and analysis systems. The Company’s inspection and metrology products and related offerings are categorized in various groups, including Chip Manufacturing, Wafer Manufacturing, Reticle Manufacturing, LED, Power Device and Compound Semiconductor Manufacturing, Data Storage Media/Head Manufacturing, Microelectromechanical Systems (MEMS) Manufacturing, and General Purpose/Lab Applications. It also provides refurbished KLA-Tencor tools as service and support for its products.
Downloadable PDF version of this valuation:
ModernGraham Valuation of KLAC – March 2018
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 | $16,691,001,025 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 3.73 | 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 | 432.27% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 23.46 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 13.62 | Fail | |
| 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 | 3.73 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 0.78 | 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 | $4.54 |
| MG Growth Estimate | 3.91% |
| MG Value | $74.11 |
| Opinion | Overvalued |
| MG Grade | C+ |
| MG Value based on 3% Growth | $65.87 |
| MG Value based on 0% Growth | $38.61 |
| Market Implied Growth Rate | 7.48% |
| Current Price | $106.57 |
| % of Intrinsic Value | 143.81% |
KLA-Tencor Corp is suitable 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 PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $3.6 in 2014 to an estimated $4.54 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 7.48% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into KLA-Tencor Corp revealed the company was trading above its Graham Number of $29.71. The company pays a dividend of $2.14 per share, for a yield of 2% Its PEmg (price over earnings per share – ModernGraham) was 23.46, which was below the industry average of 48.19, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $1.1.
KLA-Tencor Corp receives an average overall rating in the ModernGraham grading system, scoring a C+.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | $1.10 |
| Graham Number | $29.71 |
| PEmg | 23.46 |
| Current Ratio | 3.73 |
| PB Ratio | 13.62 |
| Current Dividend | $2.14 |
| Dividend Yield | 2.01% |
| Number of Consecutive Years of Dividend Growth | 7 |
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| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | 12/1/2017 |
| Total Current Assets | $4,353,993,000 |
| Total Current Liabilities | $1,166,548,000 |
| Long-Term Debt | $2,486,426,000 |
| Total Assets | $5,407,268,000 |
| Intangible Assets | $366,586,000 |
| Total Liabilities | $4,181,643,000 |
| Shares Outstanding (Diluted Average) | 156,587,000 |
Earnings Per Share History
| EPS History | |
| Next Fiscal Year Estimate | $4.64 |
| Jun2017 | $5.88 |
| Jun2016 | $4.49 |
| Jun2015 | $2.24 |
| Jun2014 | $3.47 |
| Jun2013 | $3.21 |
| Jun2012 | $4.44 |
| Jun2011 | $4.66 |
| Jun2010 | $1.23 |
| Jun2009 | -$3.07 |
| Jun2008 | $1.95 |
| Jun2007 | $2.61 |
| Jun2006 | $1.86 |
| Jun2005 | $2.21 |
| Jun2004 | $1.05 |
| Jun2003 | $0.48 |
| Jun2002 | $1.10 |
| Jun2001 | $0.34 |
| Jun2000 | $1.32 |
| Jun1999 | $0.21 |
| Jun1998 | $0.76 |
Earnings Per Share – ModernGraham History
| EPSmg History | |
| Next Fiscal Year Estimate | $4.54 |
| Jun2017 | $4.28 |
| Jun2016 | $3.51 |
| Jun2015 | $3.22 |
| Jun2014 | $3.60 |
| Jun2013 | $3.15 |
| Jun2012 | $2.69 |
| Jun2011 | $1.70 |
| Jun2010 | $0.45 |
| Jun2009 | $0.41 |
| Jun2008 | $2.08 |
| Jun2007 | $1.98 |
| Jun2006 | $1.56 |
| Jun2005 | $1.28 |
| Jun2004 | $0.83 |
| Jun2003 | $0.71 |
| Jun2002 | $0.80 |
Recommended Reading:
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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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