Is KLA-Tencor a great stock for value investors?

Value investing is undoubtedly one of the most popular methods for finding great stocks in any market environment. After all, who wouldn’t want to find stocks that either fly under the radar and represent attractive buying opportunities or offer tempting discounts compared to fair value?

One way to find these companies is to look at several key metrics and financial ratios, many of which are critical when selecting value stocks. KLA-Tencor Corporation Consider KLAC stock in this equation and find out if it’s a good choice for value investors right now or if investors following this method should look elsewhere for top picks:

P/E

One important metric that value investors always look at is the price-to-earnings (P/E) ratio. It tells us how much investors are willing to pay for each dollar of earnings from a given stock and is undoubtedly one of the most popular financial metrics in the world. The P/E ratio is best used to compare the stock’s current P/E to: a) its previous P/E, b) the industry average, and c) the overall market.

In this regard, KLA-Tencor has a P/E ratio of 14.09 for the last twelve months, as you can see in the chart below:

This level is actually quite cheap compared to the overall market, as the P/E ratio for the S&P 500 is around 20.1. If we focus on the long-term P/E trend, KLA-Tencor’s current P/E is below its mean at current levels. Moreover, the current level is well below this stock’s highs, suggesting that the stock is undervalued compared to its historical levels.

In addition, the stock’s P/E ratio also compares favorably to the trailing-twelve-month P/E ratio of the Zacks-categorized Water Treatment Equipment industry, which is 22.2. This at least suggests that the stock is currently significantly undervalued compared to its peers.

We should also point out that KLA-Tencor has a P/E ratio (price-to-earnings ratio relative to this year’s earnings) of just 15.82. So it’s safe to assume that KLA-Tencor’s stock could also take a somewhat more value-oriented development in the near future.

P/CF ratio

An often overlooked ratio that can nonetheless be a good indicator of value is the price-to-cash flow ratio. This ratio does not take into account amortization and depreciation and can therefore give a more accurate picture of a company’s financial health. Some valuation investors prefer this ratio because cash flows are (a) generally less susceptible to manipulation by the company’s management and (b) less affected by differences in the accounting policies of different companies.

The ratio is generally used to find out whether a company’s stock is overvalued or undervalued compared to its peers in terms of its cash flow generation potential. However, it is not commonly used for cross-industry comparisons because 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, suggesting that the stock is significantly undervalued in this regard.

Comprehensive value outlook

Overall, KLA-Tencor currently has a Zacks Value Style Score of “B,” putting it in the top 40% of all stocks we cover in 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 figure well below the industry average of 1.10. The PEG ratio is a modified P/E ratio that takes into account the stock’s earnings growth rate. KLAC is clearly a solid value pick from multiple perspectives.

What is the overall situation with the stock?

While KLA-Tencor could be a great choice for value investors, there are many other factors to consider before investing in this name. In particular, it’s worth noting that the company has a Growth Rating of “C” and a Momentum Score of “A.” This gives KLAC a Zacks VGM Score — or its overarching fundamental rating — of “B.” (For more information on Zacks Style Scores, click here >>)

Meanwhile, the company’s latest earnings estimates have been positive. For the current quarter, there have been three higher estimates and none lower over the past sixty days. For the full year, there have been four higher estimates and none lower over the same period.

This has had a positive impact on the consensus estimate as the consensus estimate for the current quarter has increased by 8.6% over the past two months, while the full year estimate has also increased by 4.2%. You can see the trend of the consensus estimate and the recent price action of 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 only has a Zacks Rank of 2 (Buy) and why we expect the company to perform accordingly in the short term.

Bottom line

KLA-Tencor is an inspired choice for value investors, as the incredible number of statistics in this space is hard to beat.

With a good Industry Ranking (top 7%) and a solid Zacks Rank, the company deserves attention right now. In fact, the Zacks-categorized Water Treatment Semi-Finished Products industry has significantly outperformed the broader market over the past two years, as you can see below:

Therefore, it might be worthwhile for value investors to take a closer look at the company’s prospects, as the fundamentals suggest that this stock could be an interesting choice.

Zacks’ Top Investment Ideas for Long-Term Profit

Want to see our top picks to help you find the most promising long-term stocks right now? You can now take a look at our portfolios, which include stocks under $10, income stocks, value investments, and more. These picks, which have double- and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>

Want the latest recommendations from Zacks Investment Research? Download the 7 best stocks for the next 30 days today. Click here to get this free report

KLA-Tencor Corporation (KLAC): Free Stock Analysis Report

To read this article on Zacks.com, click here.

Zacks Investment Research