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Summary

  • The company is undervalued based on 2015 earnings estimates.
  • There is strong support level at the 200-day simple moving average.
  • Financial efficiency ratios have increased from the previous quarter.

The last time I wrote about KLA-Tencor Corporation (NASDAQ:KLAC) I stated, "Due to the high earnings growth rate expectations, near oversold technicals, and excellent dividend yield, I will take a chance here and buy an additional small batch to my position." After the writing the article the stock decreased 3.66% versus the 4.5% gain the S&P 500 (NYSEARCA:SPY) posted, and I'll have to admit it was a bad call. KLAC is engaged in the design, manufacturing and marketing of process control and yield management solutions for the semiconductor and related nano-electronics industries.

On April 24, 2014, the company reported fiscal third quarter earnings of $1.23 per share, which beat the consensus of analysts' estimates by $0.12. In the past year the company's stock is up 15.84% excluding dividends (up 18% including dividends) and is losing to the S&P 500, which has gained 16.14% 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 right now is a good time to purchase more of the stock for my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 18.08, 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 14.72 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.29 per share and I'd consider the stock inexpensive until about $64. The 1-year PEG ratio (1), 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 fairly priced based on a 1-year EPS growth rate of 18.04%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 18.04%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 15.8%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

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

23.00

14Feb14

64.44

19.77

13.57

4.75

71

0.79

24.92

14Mar14

66.88

20.52

14.25

4.69

70

0.86

23.75

14Apr14

65.50

20.09

14.00

4.68

70

0.86

23.40

13May14

63.10

18.08

14.72

4.29

64

1.00

18.04

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 2.85% with a payout ratio of 52% of trailing 12-month earnings while sporting return on assets, equity and investment values of 11%, 16.6% and 13.8%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.85% yield of this company is good enough for me to take shelter in for the time being. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

09Aug13

3.08

49

10.5

15.9

13.8

11Nov13

2.87

59

10.0

15.1

13.8

14Feb14

2.79

55

10.4

15.8

13.8

14Mar14

2.69

55

10.4

15.8

13.8

14Apr14

2.75

55

10.4

15.8

13.8

13May14

2.85

52

11.0

16.6

13.8

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling in middle-ground territory with a current value of 41.6. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is about to cross above the red line with the divergence bars increasing in height, indicating bullish momentum. As for the stock price itself ($63.10), I'm looking at the 20-day simple moving average (currently $64.36) to act as resistance and the 200-day simple moving average (currently $62.48) to act as support for a risk/reward ratio which plays out to be -0.98% to 2%. For the past six months the 200-day simple moving average as acted as strong support for the stock and served as a trampoline a couple of times.

Recent News

  1. The company declared a $0.45 per share quarterly dividend. The dividend has an ex-date of 15May14 with a pay date of 02Jun14 for a yield of 2.88%.
  2. Fiscal third quarter earnings beat on the top and bottom lines. Earnings were at $1.23 on revenue of $832 million versus expectations of $1.11 and $822.64 million.
  3. On the company's quarterly earnings conference call they announced guidance which was below expectations. Revenue guidance was between $700 million to $760 million and earnings guidance was $0.75 and $0.95, both of which were below estimates of $832.5 million and $1.16 per share.

Conclusion

Since winning my Dividend Portfolio Super Bowl, KLAC is up 2.32% against the 6.41% gain the S&P 500 has posted. The stock was up much more against the S&P500 until it hit the brick wall called Next Quarter's Earnings Guidance. Fundamentally, this company is undervalued on next year's earnings and fairly valued on earnings growth potential while short and long-term earnings growth expectations are excellent. Financially, this is a high yielding dividend company which is well supported by earnings and free cash flow. Technically, the stock is approaching a strong support level in the 200-day simple moving average. Due to the high earnings growth rate expectations, strong support level at the 200-day simple moving average, and excellent dividend yield, I will take a chance here and buy an additional small batch to my position.

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.

Source: I'm Buying High-Yielding KLA-Tencor Corp. Cautiously Right Now