KLA Corporation (“KLAC”) – The Investor Weekly Stock Report
KLA continues to outperform expectations despite significant supply chain challenges.
KLA’s outperformance was evident during the September 2021 quarter, demonstrating the strong momentum in core markets and the attractive operating leverage inherent in the KLA financial model.
The Company holds a strong earnings record. It posted year-over-year EPS growth of 56%, 62% and 53% over the past three quarters. Meanwhile, revenue growth has risen from 27% to 32% then 35% in that time frame. This marks two quarters of growth acceleration.
KLA maintains strong pricing power and excellent margins; necessary elements in an inflationary environment.
KLA has a strong competitive moat driven by customer relationships, a broad IP portfolio, significant R&D investments, and differentiated solutions.
The company was formerly known as KLA-Tencor Corporation and changed its name to KLA Corporation in July 2019. KLA Corporation was incorporated in 1975 and is headquartered in Milpitas, California.
KLA Corporation designs, manufactures, and markets process control and yield management solutions for the semiconductor and nanoelectronics industries worldwide.
KLA operates from 19 global locations and employs more than 11,000 employees.
What Does KLA Products and Services Do?
KLA systems, software and services enable advanced inspection and measurement for IC and chip manufacturers. The Company is focused specifically on process control. KLA supports customers across all phases of semiconductor fabrication process from R&D to final volume manufacturing.
The company offers chip and wafer manufacturing products. Additionally, it provides wafer processing solutions; printed circuit boards, and display and inspection components.
KLA’s maintains a leading position in the process control market, including optical technology, which is the dominant technology for inspection and metrology equipment. This helps customers to improve manufacturing processes.
In a nutshell, KLAC systems analyze defectivity and metrology issues at critical points in the wafter, reticle and manufacturing process. It provides information to customers so they can identify and address process issues.
KLA continues to hold more than 50% market share in the process control market. In fact, it holds 4x the market share of its nearest competitor. Semiconductor equipment firms provide the tools needed by manufacturers. KLA’s AI-enabled tools specialize in detecting chip defects, speeding up the development process and increasing chipmaker profitability.
End markers include Asia (>80%), North America (>10%), and Europe and Israel (~10%). The ongoing global chip shortage has provided ideal conditions for strong growth in the semiconductor industry. And due to record high demand, KLA’s profits have risen in recent quarters.
The Company manages its supply chain well despite the logistical challenges the industry continues to face. Peers, including LRCX and AMAT, have not fared as well.
From 2020 to 2024 semiconductor markets are expected to grow by a CAGR of 7%. Most of the growth is expected to come from the mobile transition to 5G, cloud expansion and automotive growth in the areas of electrification, connectivity and autonomous vehicles.
Market Cap: $65.52 billion
Total Debt: $3.54 billion
Cash: $2.62 billion
Enterprise Value: $66.44
After the strategic acquisition of Orbotech in 2019, KLA continues to generate the cash flow necessary to pay down debt used to partially finance the acquisition. Deleveraging remains a priority for the Company.
Year-to Date Performance
KLA has a high level of institutional ownership. Major shareholders include Vanguard and Blackrock.
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KLA’s stock has grown 3X that of AMAT and LRCX in the past six months. It has also topped all major equipment suppliers with year-over-year growth of 42% in 2021. Its revenue is 4x greater than its nearest competitors.
KLA continues to have a history of best-in-class margins versus leading peers.
R&D Investment Leader
KLA maintains a high level of research and development spending. It’s process control R&D is larger than many competitors’ process control revenue.
KLA maintains an asset-lite business model and continues to return large amounts of capital to shareholders.
CAPEX, as a percentage of revenue, is roughly 3%.
This compares to an average 8% for NASDDAQ-listed stocks.
KLA generates $1.9 billion of free cash flow and has a FCF margin of 30%. Year-over-year cash flow growth for KLA is 15.8%, which is greater than many of its peers. And the Company’s cash flow growth rate has been nearly 30% over the past 5 years. KLA is committed to returning > 70% free cash flow returned to shareholders through dividends and buybacks.
Revenue growth continues to accelerate into the digital era and KLA provides a successful service business model that produces a steady recurring revenue stream.
Quarterly Results – October 27, 2021
Revenue for the quarter came in at $2.08 billion, a beat by $40.84 million. And EPS came in at $4.64, which beat estimates by $0.12. The next earnings release will take place on January 26, 2022. Revenue estimates are for $2.33 billion and EPS estimates are for $5.45.
Earnings Per Share
Earnings Estimates – 2021E, 2022E, 2023E
KLA has received positive, upward revisions of EPS for 2022 and 2023. Over the last four quarters, the company has surpassed consensus EPS estimates four times.
The current consensus EPS estimate is $5.17 on $2.24 billion in revenues for the coming quarter and $19.33 on $8.61 billion in revenues for the current fiscal year.
KLA has produced 11 years of consecutive dividend increases. The Company targets a dividend payout ratio of roughly 35%. Between 2006 and 2021E, dividends have increased by 15% CAGR.
Strong Balance Sheet
KLA has a strong balance sheet with no bond maturities until 2024. The Company maintains investment grade credit ratings.
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Six investment analysts have rated the stock with a hold rating and fifteen have assigned a buy rating to the company’s stock.
According to MarketBeat.com, KLA has an average rating of Buy and an average price target of $415.90.
Average Price Target: $439.86
KLA’s premium P/E multiple is driven by its high growth potential and low risk. Historically KLA has traded at a multiple close to 2x LRCX. But we believe that this multiple is justified, as the company has stronger financials.
The Investor Weekly built a position at the end of October at $339.00.
Shares rose on December 21, 2021 after a Wells Fargo analyst upgraded its price target to $500 from $360. The firm raised its outlook to overweight and named the company its top semiconductor pick for 2022. Shares reacted positively with a gap up in heavy volume.
Ahead of the upgrade, the stock tested support at its 10-week line, which currently sits at around $398.70. This also serves as an alternate entry for investors looking to add shares or initiate a position. KLAC stock is roughly 5% above the 10-week line, which means the entry is still in play. At 10%, shares would be considered extended and no longer actionable.
The recent volume suggests there’s power behind KLAC’s rise, especially given the holiday-driven low-volume environment.
Barclays lifted their price objective on shares of KLA from $325.00 to $350.00 and gave the stock an equal weight rating in a research note on October 28th. Bank of America lifted their price objective on shares of KLA from $425.00 to $450.00 and gave the stock a buy rating in a research note on September 17th. Deutsche Bank lifted their price objective on shares of KLA from $420.00 to $475.00 and gave the stock a buy rating in a research note on December 15th. Susquehanna Bancshares lifted their price objective on shares of KLA from $475.00 to $490.00 and gave the stock a positive rating in a research note on October 28th. Finally, Morgan Stanley lifted their price objective on shares of KLA from $399.00 to $431.00 and gave the stock an equal weight rating in a research note on December 15th.
KLA Investor Relationshttps://d1io3yog0oux5.cloudfront.net/_650ca394533d1c07c124faa627eb2e86/klatencor/db/1091/10326/pdf/2021+UBS+Industrials+Conf.+Presentation+FINAL+6.9.21.pdf
I am/we are long KLAC either through stock ownership, options, or other derivatives.
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