KLA-Tencor: Zacks’ Bull of the Day Play

KLA-Tencor (KLACFree Report) recently beat the Zacks Consensus Estimate and then guided Wall Street higher which has sent estimate higher.  This has caused the Zacks Rank to move up to a Zacks Rank #1 (Strong Buy) and today it is the Bull of the Day.

The last several months have been very good ones to the semiconductor stocks.  It looks like there is evidence that the run will continue if not pick up speed.  Other high profile names have seen renewed interest from analysts as Artificial Intelligence, Autonomous Driving, and 3-D Virtual Reality concepts begin to move from beta into the mainstream.   This is all good news for the chip industry.

Description

KLAC is a semiconductor capital equipment company, they make the equipment that will help the chip companies make their chips.

Follow Brian Bolan on Twitter @BBolan1

Recent Earnings

KLA Tencor (KLACFree Report) beat the Zacks Consensus Estimate of $1.41 by $0.11 in posting earnings of $1.52.  That translates into a positive earnings surprise of 7.8% marking the 10th straight beat of the Zacks Consensus Estimate.

Guidance called for revenue of between $860M – $920M when the consensus estimate was calling for $849M.  As the aggressive growth stock strategist at Zacks, this is what I love to see.  Also on the call, management noted that they expect CY17 gross margin to be a “couple hundred basis points” better than previously expected.

It world of beating and raising this stock has higher revenues and higher margins.  Usually, when that happens you see higher multiples.  Speaking of multiples, KLAC trades at 15.6x forward estimates and over the last two years the stock has traded between 13.2x and 17.8x.  This tells me that the stock could go as high as $109 (17.8*6.17) if it trades at the high end of the range over the last two years.

Room For Upgrades For KLAC

One thing that I like to see is a stock that has room for future catalysts.  KLAC has three brokerages that have “Hold” or equivalent ratings on the stock.  Instinet is by far the most bearish of the three with a price target of $78 and a neutral rating.  Stifel Nicolaus has a hold and a price target of $83. A few days after the most recent report Deutsche Bank reiterated their “Hold” on the stock and increased their price target from $78 to $85.

Goldman Sachs, Cowen and Company, Credit Suise, B. Riley and Needham all have KLAC at either “Buy” or “Strong Buy” or the equivalent.  Of those, B. Riley is the most bullish with a $106 price target and Needham is just a dollar behind at $105.

The Big Tell For KLAC

Over the years I have picked up on the lingo for chip stocks.  At first I learned all about book to bill and after that the focus became backlog.  More recently I have picked up an even bigger tell than a stock with records billings or record backlog.  The phrase that pays is “design wins.”

During the most recent conference call management spoke the phrase that pays when talking to 3D NAND.  If there is anything that is as good as a design win, I have yet to know what it is.  This ensures some high margin business over the next 6 to 18 months, and that alone should have the multiple for this stock increasing.

Future Catalysts

Nvidia (NVDAFree Report) is reporting earnings after the close on Feb 9 and Wall Street is looking for revenues of $2.1B and EPS of $0.98.  This chip maker has been soaring of late and it recently received a price target increase from $115 to $124 by RBC Capital Markets.  A strong report from this company could lift shares of stocks in the entire industry.

KLAC will be speaking that the Goldman Sachs Technology and Internet Conference on February 15.  This conference will be broadcast over the web with Bren Higgins the CFO speaking with the covering analyst at Goldman Sachs.  There could be a short Q&A session as well.  You can listen to the call at 11 AM PST here.

KLA-Tencor Corporation Price, Consensus and EPS Surprise

KLA-Tencor Corporation Price, Consensus and EPS Surprise | KLA-Tencor Corporation Quote

Now, which stocks should you sell?

As a Zacks Rank #1 Strong Buy, this Bull of the Day deserves consideration. But today there are 220 Zacks Rank #5 Strong Sells that demand even more urgent attention. If any of these are lurking in your portfolio, they should be removed immediately. Since 1988, such stocks have actually performed more than 11X worse than the S&P 500. See all Zacks Strong Sells and Strong Buys absolutely free >>.

In-Depth Zacks Research for the Tickers Above

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NVIDIA Corporation (NVDA) – free report >>

KLA-Tencor Corporation (KLAC) – free report >>

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