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 14.09, 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 20.1. If we focus on the long-term PE trend, the current level puts KLA-Tencor’s current PE ratio below its midpoint. Moreover, the current level is fairly below the highs for this stock, suggesting that the stock is undervalued compared to its historical levels.
Further, the stock’s PE also compares favorably with the Zacks Categorized Semi-Equipment Water Fabrication industry’s trailing twelve months PE ratio, which stands at 22.2. At the very least, this indicates that the stock is highly 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 15.82, so it is fair to say that a slightly more value-oriented path may be ahead for KLA-Tencor stock in the near term too.
P/CF Ratio
An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, KLA-Tencor’s P/CF ratio of 20.2 is lower than the Zacks Categorized Semi-Equipment Water Fabrication industry average of 32.4, which indicates that the stock is highly undervalued in this respect.
Broad Value Outlook
In aggregate, KLA-Tencor currently has a Zacks Value Style 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 0.74, a level that is fairy lower than the industry average of 1.10. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, KLAC 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 grade of ‘C’ and a Momentum score of ‘A’. 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 positive. The current quarter has seen three estimates go higher in the past sixty days compared to none lower, while the full year estimate has seen four up and no down in the same time period.
This has had just a favorable impact on the consensus estimate as the current quarter consensus estimate has risen by 8.6% in the past two months, while the full year estimate has also risen by 4.2%. You can see the consensus estimate trend and recent price actionfor the stock in the chart below:
KLA-Tencor Corporation Price and Consensus
KLA-Tencor Corporation Price and Consensus | KLA-Tencor Corporation Quote
This positive trend is the reason why the stock has just a Zacks Rank #2 (Buy) and why we are looking for in-line performance 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 lineup of statistics on this front.
Boasting a good industry rank (top 7%) and a solid Zacks Rank, the company deserves attention right now. In fact, over the past two years, the Zacks Categorized Semi-Equipment Water Fabrication industry has also clearly over performed the broader market, as you can see below:
So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.
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