With a daily gain of 2.67% and a 3-month gain of 16.15%, KLA Corp (KLAC, Financial) certainly grabs the attention of value investors. Its Earnings Per Share (EPS) (EPS) stands at an impressive 24.09. But does this make it a good buy? Is the stock fairly valued? This article aims to answer these questions by delving deep into the valuation analysis of KLA Corp (KLAC). Read on to discover more.
Introduction to KLA Corp (KLAC, Financial)
KLA Corp (KLAC) designs and manufactures yield-management and process-monitoring diagnostic and control systems for the semiconductor manufacturing industry. These systems are used to analyze the manufacturing process at various stages of a semiconductor's development. KLA's laser-scanning products are used for wafer qualification, process monitoring, and equipment monitoring. The firm also provides inspection tools and systems for optical metrology and e-beam metrology.
The current stock price of KLA stands at $490.71, with a market cap of $67.10 billion. When compared to the GF Value of $477.1, it appears to be fairly valued. The following income breakdown provides an insight into KLA's financial performance:
Understanding the GF Value
The GF Value is a proprietary method that calculates the intrinsic value of a stock. The GF Value Line on our summary page provides a quick overview of the fair value at which the stock should ideally be traded. This value is derived from three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
The GF Value Line is considered the fair value at which the stock should be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on GuruFocus' valuation method, KLA (KLAC, Financial) appears to be fairly valued. The stock's fair value is estimated considering three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns. At its current price of $490.71 per share, KLA has a market cap of $67.10 billion and the stock shows every sign of being fairly valued.
Because KLA is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Evaluating KLA's Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to carefully review a company's financial strength before deciding to buy shares. A good initial perspective on the company's financial strength can be obtained by looking at the cash-to-debt ratio and interest coverage. KLA has a cash-to-debt ratio of 0.54, which ranks worse than 77.23% of 865 companies in the Semiconductors industry. Based on this, GuruFocus ranks KLA's financial strength as 6 out of 10, suggesting a fair balance sheet. Here's a look at KLA's debt and cash over the past years:
Profitability and Growth of KLA
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. KLA has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $10.50 billion and Earnings Per Share (EPS) of $24.09. Its operating margin is 38.06%, which ranks better than 96.47% of 936 companies in the Semiconductors industry. Overall, GuruFocus ranks the profitability of KLA at 10 out of 10, which indicates strong profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of KLA is 26.8%, which ranks better than 80.92% of 865 companies in the Semiconductors industry. The 3-year average EBITDA growth rate is 40.6%, which ranks better than 72.92% of 768 companies in the Semiconductors industry.
ROIC vs WACC
Another way of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, KLA's return on invested capital is 37.17, and its cost of capital is 12.01. The historical ROIC vs WACC comparison of KLA is shown below:
Conclusion
In summary, the stock of KLA Corp (KLAC, Financial) shows every sign of being fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 72.92% of 768 companies in the Semiconductors industry. To learn more about KLA stock, you can check out its 30-Year Financials here.
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