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Summary

  • The stock is fairly valued on 2015 earnings estimates and growth potential.
  • The stock has popped up 8.67% in the last month versus the 2.04% gain the S&P 500 has made.
  • The dividend is currently higher than the yield on the 10-year treasury (2.61%).

The last time I wrote about KLA-Tencor Corporation (NASDAQ:KLAC) I stated, "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." After writing the article the stock has popped 8.67% versus the 2.04% gain the S&P 500 (NYSEARCA:SPY) posted. 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 23.08% excluding dividends (up 25.95% including dividends) and is beating the S&P 500, which has gained 19.01% 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 19.65, 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 16 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.09), 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 18.07%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 18.07%. 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

15Jun14

68.57

19.65

16.00

4.29

64

1.09

18.07

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 2.63% 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 2.63% 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

15Jun14

2.63

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 approaching overbought territory with a current value of 63.99. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is just about to cross above the red line with the divergence bars increasing in height, indicating bullish momentum may just be getting started. As for the stock price itself ($68.57), I'm looking at $78.13 to act as resistance and the 20-day simple moving average (currently $65.12) to act as support for a risk/reward ratio, which plays out to be -5.03% to 13.94%.

What Has Changed?

From the tables above we see that nothing has changed really from May to June, but I'd like to see what happened with the 2015 earnings estimates getting lowered between April and May. On 25April14 Northland Capital cut the price target for the company from $69 to $62. They weren't the only firm to lower the price target for KLAC, as analysts at B.Riley downgraded the stock from a "buy" to "neutral" and the price from $70 to $65 on the same day. Citi actually reiterated the "buy" rating on the stock a few days before on 22Apr14 with a $75 target.

Conclusion

Earnings estimate and price target cuts are never a good thing. Management provided fiscal fourth quarter revenue guidance of $700 to $760 million and earnings of $0.75 to $0.95 per share. Both estimates were below estimates of $832.5 million and $1.16 per share. The company blames the guidance on delays from clients in ramping production of 3D transistors and said 3D NAND production is being pushed out. Fundamentally, the company is fairly valued based on next year's earnings estimate and on future growth potential, while sporting excellent near- and long-term earnings growth potential, but the earnings estimate cuts for 2015 are what scare me. Financially, the company sports a high dividend yield which is well supported and I believe it can be raised the next quarter. On a technical basis, the stock is near overbought territory but what looks to be bullish momentum going for it with a pretty good reward to risk ratio. Even though the company has been performing well from a stock price perspective lately, I will not be pulling the trigger on this name right now because I believe it has run up too far and too fast.

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!

Source: Has High-Yielding KLA-Tencor Run Up Too Fast?