High Yielding KLA-Tencor Is A Battleground Stock That Can Have A Higher Yield

Nov.12.13 | About: KLA-Tencor Corporation (KLAC)

The last time I wrote about KLA-Tencor Corporation (NASDAQ:KLAC) I bought a small position in it stating with the caveat that I was looking to get out of the stock due to the downside guidance issued by the company. Since my last article I have kept the stock and it actually shot up 7.44% excluding dividends (and is up 8.2% including the dividend) versus the 4.37% gain the S&P500 (NYSEARCA:SPY) posted. KLAC is engaged in the design, manufacture and marketing of process control and yield management solutions for the semiconductor and related nano-electronics industries. On October 24, 2013, the company reported fiscal first quarter earnings of $0.68 per share, which beat the consensus of analysts' estimates by $0.03. In the past year the company's stock is up 35.77% excluding dividends (up 38.87% including dividends), and is beating the S&P 500, which has gained 28.41% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the technology sector of my dividend growth portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 20.45, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 13.43 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.67 per share and I'd consider the stock inexpensive until about $70. The 1-year PEG ratio (0.89), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is inexpensively priced based on a 1-year EPS growth rate of 23%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 23%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 16.1%. Below is a comparison table of the fundamentals metrics for the company from the last time I wrote the article to now.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

09Aug13

58.43

18.2

12.27

4.76

71

0.87

21.01

11Nov13

62.78

20.45

13.43

4.67

70

0.89

23

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Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.87% with a payout ratio of 59% of trailing 12-month earnings while sporting return on assets, equity and investment values of 10%, 15.1% and 13.8%, respectively, which are all respectable values but nothing to go writing home about. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.87% yield of this company is good enough for me to take shelter in for the time being. Below is a comparison table of the financials metrics for the company from the last time I wrote the article to now.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

09Aug13

3.08

49.1

10.5

15.9

13.8

11Nov13

2.87

59

10

15.1

13.8

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Technicals

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Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around in middle territory with a value of 46.68 but with downward trajectory, which is a bearish pattern. To confirm that, I will look at the moving average convergence-divergence (MACD) chart next and see that the black line is below the red line with the divergence bars decreasing in height, indicating a bearish pattern. As for the stock price itself ($62.78), I'm looking at $68.82 to act as resistance and $60.60 to act as support for a risk/reward ratio, which plays out to be -3.47% to 9.62%.

Recent News

  1. Mehdi Hosseini of Susquehanna downgraded KLAC to negative from neutral because he believes the wafer fab portion of the chip equipment industry will post a lower growth rate in 2014 and that the bookings for the company will see a sharp decline. This sentiment jives with what the CEO stated during the last quarter with the downward guidance. KLAC dropped 3.12% on the news.
  2. KLAC declared a $0.45 per share quarterly dividend with an ex-date of 14Nov13 and pay date of 02Dec13 for a yield of 2.87%.
  3. On the opposite side of Susquehanna, Credit Suisse (NYSE:CS) chose KLAC as one of it's top investment ideas over the next 6-12 months.

Conclusion

There seems to be a lot of mixed news concerning the stock. After issuing downside guidance back on the fiscal fourth quarter earnings report the stock soared upwards, and now we have one firm downgrading the stock with another one making it one of its top picks. What gives! This seems like a battleground stock with good news flying here and bad news flying there. Fundamentally, the stock is cheap on future earnings and growth potential, has lowered earnings expectations and is a bit more expensive than what it was a few months ago. Financially, things are deteriorating with the payout ratio increasing as the dividend has not been raised while the returns on assets and equity are dropping. Technically, there is a bit of bearish trajectory taking place. I really like the high growth prospects the company has to offer and would like to purchase the stock, but it is just such a battleground stock right now. Because the earnings estimates for next year have been lowered, the bearish technicals and the deteriorating financials I will only add a small position in the stock right now because I think I can get it at a lower price.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long KLAC, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.