Morningstar | Inclusion of Orbotech Drives KLA’s Fiscal 3Q Sales Higher; Shares Look Fairly Valued
KLA reported fiscal third-quarter results in line with our expectations. The firm closed its Orbotech acquisition during the quarter, incorporating partial-period results. Orbotech boasts a complementary equipment portfolio that tailors to the manufacturing of printed circuit boards, flat panel displays, and semiconductor devices. While we remain positive on the deal for diversification purposes, we believe the expected revenue and cost synergies are offset by the premium paid for the $3.2 billion deal. Thus, we are maintaining our $128 fair value estimate for wide-moat KLA. Despite the near-term challenges related to weaker memory spending, KLA is on track to record a solid growth year in calendar 2019. Nevertheless, with the stock up 39% year to date, we would recommend a wider margin of safety in the process diagnostic and control leader.Third-quarter revenue grew 7.4% year over year to $1.1 billion, bolstered by $161 million in Orbotech sales. Semiconductor process control shipments were $957 million, which was above management’s guidance. Foundry shipments nearly quadrupled year over year to about $517 million thanks to 7-nanometer-related investments by the likes of TSMC and Samsung. KLA’s flagship, fifth-generation optical inspection tool continues to gain traction, with management anticipating 30 units in the field by the end of calendar 2019. As the pursuit of Moore’s Law continues to get more challenging, we expect premium products from KLA to grow nicely as the firm helps facilitate EUV lithography and multiple patterning. Gross margins fell 790 basis points sequentially due to Orbotech and a weaker product mix, though margins are poised to track back up toward 60% over the course of the year. Management expects fiscal fourth-quarter sales to be about $1.25 billion, which would imply fiscal 2019 revenue growth of 13%.
For more information on our thoughts on the WFE space in 2019 and beyond, please see our Technology Select Presentation “Buy the Chip Equip Dip.â€
KLA is a supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industries. The company provides process control and process-enabling solutions for manufacturing and testing wafers and reticles, integrated circuits, packaging, light emitting diodes, power devices, compound semiconductor devices, microelectromechanical systems, data storage, printed circuit boards (PCBs), and flat and flexible panel displays, as well as general materials research. The company has four reportable segments which include Semiconductor Process Control; Specialty Semiconductor Process; PCB, Display and Component Inspection; and Other.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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