KLA Helps Bake A Tasty Wafer

2/20/2012


  Recent Price
$50
  Dividend
$1.40
  Yield
2.8%
  P/E Ratio
11
  Shares (millions)
169
  Long-Term Debts as % of Capital
20%
  52-Week Price Range
$53.05 - $33.20

KLA-Tencor ($50; KLAC) makes testing and inspection equipment for the semiconductor industry. As integrated circuits become more complex, KLA is seeing heightened interest in its products.

Demand for mobile devices — and the semiconductors powering them — keeps the foundries humming and hungry to adopt new innovations that can provide a competitive edge. Of course, KLA's revenue depends on the highly volatile capital spending of semiconductor manufacturers. But long-term trends tilt in KLA's favor as customers strive to cram more circuits on smaller chips, and at lower costs. KLA-Tencor is a Buy.

Business breakdown

The cyclical nature of the semiconductor industry requires foundries to respond quickly to changes in market demand and adapt swiftly to new innovations. Manufacturers use KLA's products from research and development through final production.

Fabrication begins with the silicon wafer — a grey, round disk up to 12 inches in diameter, and as thin as a credit card. During production, a process that involves hundreds of individual steps, transistors, circuit patterns, and film are added to the wafers. KLA's equipment and software help increase the percentage of manufactured wafers that conform to specifications, minimizing waste. These tools also help manufacturers locate and address defects, such as when a wafer's dimensions or film thickness deviates from the norm. In short, KLA helps clients increase their control over the manufacturing process, improving return on investment.

Intel ($27; INTC), Samsung, and Taiwan Semiconductor Manufacturing ($14; TSM) each accounted for more than 10% of KLA's revenue in fiscal 2011 ended June. Although its customer base is becoming more concentrated, gross profit margins are holding up fairly well, suggesting that KLA products still command a premium price relative to those of many peers.

Operating cash flow jumped 88% to $940 million in the 12 months ended December. KLA returned 32% of that operating cash flow to shareholders through dividends and share repurchases. The dividend, initiated in February 2005, currently provides investors with a 2.8% yield. About 5.9 million shares remain in the stock-buyback program, enough to repurchase more than 3% of outstanding shares.             

Conclusion

The outlook for the calendar year 2012 appears positive, with semiconductor makers' capital expenditures likely remaining strong. Intel plans to boost capital spending 16%, and Samsung projects a 15% increase for its semiconductor business.

In January, KLA issued March-quarter guidance that exceeded consensus estimates. The company expects per-share earnings of $1.00 to $1.18, implying a 10% to 24% decline.

Shares trade at less than 11 times trailing earnings, 43% below their five-year average. The stock also looks cheap relative to historical price/sales, price/cash flow, and enterprise ratios. An annual report for KLA-Tencor Corp. is available at One Technology Drive, Milpitas, CA, 95035; (408) 875-3000; www.kla-tencor.com.

KLA-TENCOR
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '11
0.72
vs.
1.17
- 16%
49.39
-
36.62
10 - 7
Sep '11
1.17
vs.
0.99
+ 17%
44.60
-
33.20
9 - 7
Jun '11
1.51
vs.
0.70
+ 60%
47.76
-
37.85
11 - 9
Mar '11
1.31
vs.
0.41
+ 74%
51.83
-
36.90
16 - 11
           
Year
(Jun.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend ‡
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
3.18
4.91
1.10
51.83
-
26.69
11 - 5
2010
1.82
1.54
0.60
37.71
-
24.75
24 - 16
2009
1.52
-0.22
0.60
42.03
-
14.81
NA
2008
2.52
2.78
0.60
62.67
-
35.02
23 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
71
80
93
86
98
71

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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