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Should Value Investors Pick KLA-Tencor (KLAC) Stock Now?

Zacks Equity Research

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put KLA-Tencor Corporation KLAC stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, KLA-Tencor has a trailing twelve months PE ratio of 13.54, as you can see in the chart below:

 

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 18.23. If we focus on the long-term PE trend, KLA-Tencor’s current PE level puts it below its midpoint over the past five years.

 

Further, the stock’s PE also compares favorably with the Zacks Computer and Technology sector’s trailing twelve months PE ratio, which stands at 20.39. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

 

We should also point out that KLA-Tencor has a forward PE ratio (price relative to this year’s earnings) of just 14.74, which is tad higher than the current level. So it is fair to expect an increase in the company’s share price in the near term.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings. 

Right now, KLA-Tencor has a P/S ratio of about 4.39. This is higher than the S&P 500 average, which comes in at 3.32 right now.  Also, as we can see in the chart below, this is above the highs for this stock in particular over the past few years. 

 

If anything, KLAC is near the higher end of its range in the time period from a P/S metric, suggesting some level of overvalued trading—at least compared to historical norms. 

Broad Value Outlook

In aggregate, KLA-Tencor currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes KLA-Tencor a solid choice for value investors, and some of its other key metrics make this pretty clear too.  

For example, the PEG ratio for KLA-Tencor is just 1.32, a level that is lower than the industry average of 1.46. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, KLA-Tencor is a solid choice on the value front from multiple angles. 

What About the Stock Overall?

Though KLA-Tencor might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of C and a Momentum Score of C. This gives KLAC a Zacks VGM score — or its overarching fundamental grade — of B. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been encouraging. The current quarter has seen five estimates go higher in the past sixty days compared to no movement in the opposite direction, while the current year estimate has seen five upward revision compared to one downward in the same time period.

This has had a positive impact on the consensus estimate though as the current quarter consensus estimate has increased by 5.2% in the past two months, while the current year estimate has risen by 1.1%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

KLA-Tencor Corporation Price and Consensus

 

KLA-Tencor Corporation Price and Consensus | KLA-Tencor Corporation Quote

This bullish trend is why the stock boasts a Zacks Rank #2 (Buy) and why we are expecting outperformance from the company in the near term.

Bottom Line

KLA-Tencor is an inspired choice for value investors, as it is hard to beat its incredible line up of statistics on this front. A solid Zacks Rank #2 further instils our confidence. In fact, over the past two years, the Zacks Semiconductor Equipment - Wafer Fabrication industry has clearly outperformed the market at large, as you can see below:

 

However, a sluggish industry rank (among bottom 24% of more than 250 industries) makes it hard to get too excited about this company overall.

So, value investors might want to wait for the broader factors to turn around in this name first, but once that happens, this stock could be a compelling pick.

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