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Bull of the Day: KLA Corporation (KLAC)

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Today’s Bull of the Day is far from a household name. Though KLA Corporation (KLAC - Free Report) is responsible for many of the processes and products that make our modern electronic lives possible, few people outside the technology and investment fields tend to be aware of the company.


KLAC’s contributions to integrated circuits, wafers and flat-panel displays are probably at work right now in your computer, monitor, phone and television, yet all of those products bear the name of a different company.


Formed by the merger of KLA Instruments and Tencor Instruments in 1997, KLAC has relentlessly pursued advances in its own technology as well as acquiring 27 additional companies.  They now boast a global footprint in manufacturing, R&D and support services that spans the US, Europe, the Middle East and Asia.


Despite the lack of consumer-level recognition, KLAC’s focus on innovation makes it a trusted source within the industry, as well as providing a diverse revenue stream that largely insulates the company from the boom and bust cycles that plague many high-tech suppliers.


KLAC’s core product line performs critical functions within the chip and electronics manufacturing process and its Service business provides technical support, knowledge management and an extensive worldwide network of parts and supplies. Customers rarely make a single purchase, but rather continue to rely on continued support throughout the product lifecycle. Roughly 75% of Service revenue is contract based, further smoothing out revenue trends.


The market for talent in Silicon Valley is fiercely competitive, but KLAC has made attracting and retaining key employees part of it’s culture.  Nearly 40% of its workforce holds an advanced degree, yet employee turnover of less than 5%/year is about half of the industry average.


A disciplined Capital Allocation model stokes the fires of growth while also ensuring the return of value to shareholders. KLAC lists its primary capitol allocation priorities as R&D, Working Capital and Strategic Acquisitions. Secondary allocation priorities are dividends, share repurchases and debt service.


Over the past 10 years, KLAC has increased its annual shareholder dividend from $0.60/share to $2.84/share – a yield of just under 2% at the current share price.


The total return to shareholders over that same period has been a whopping 674% - more than double the return of the S&P 500.



KLAC’s long-term revenue model seeks to maintain and improve that outstanding shareholder returns  with growth in Services, gains in market share and an increase in industry-wide sales.


Despite delivering steady revenue and sales growth that’s the envy of the tech sector, KLAC currently trades at a lower P/E Ratio of just 16.7X – lower than the S&P 500 and much lower than most of the industry.


Tech investments often conjure up images of big risk and potentially big returns. Despite their focus on cutting edge products and services, KLAC’s financial discipline means investors don’t have to endure the risk to get the rewards. Management’s focus on shareholder value has rewarded faithful investors with market-beating returns and below-average volatility.


Six recent upwards earnings revisions earn KLAC a Zacks Rank #1 (Strong Buy) and 16 consecutive beats of the Zacks Consensus Earnings Estimates make it comfortable to sleep at night, safe in the knowledge that the management and staff of one of the best - and yet least-known - tech companies is working for you.


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