Analyst Sees KLA-Tencor Having A Break Out Year In 2018

After a strong performance throughout 2017, KLA-Tencor Corp KLAC remains an underappreciated stock that will likely "break out" in 2018, according to at least one Wall Street analyst.

The Analyst

KeyBanc Capital Markets' Weston Twigg upgraded KLA-Tencor's stock from Sector Weight to Overweight with a $134 price target.

The Thesis

Many of KLA-Tencor's peers oversaw a large increase in 3D NAND capex which drove significant outperformance throughout 2017, but NAND capex growth is expected to decelerate to just 3 percent in 2018, Twigg said in a note. DRAM capex will likely be moderately higher at 9 percent which implies that KLA-Tencor will likely see a top-line growth profile that's more comparable to its peers in the coming years. But if foundry spending accelerates to support 7nm, or if the company sees traction with its new products, then it could see even higher growth rates.

Meanwhile, KLA-Tencor's margins profile will likely remain a best-in-class through fiscal 2019, the analyst said. Specifically, the company's margins will likely remain between 63 to 64 percent through fiscal 2019, which compares favorably to Applied Materials, Inc. AMAT at 46 to 47 percent. The company's operating margin will likely remain between 37 to 40 percent over the same time period, which also compares favorably to Applied Materials at 29 to 30 percent.

KLA-Tencor's stock should trade at a premium valuation given a superior model. The analyst's new $134 price target implies an 18 times multiple on his C2018 EPS estimate of $7.44.

Price Action

Shares of KLA-Tencor were trading higher by around 1 percent Monday morning and are up nearly 35 percent since the start of 2017.

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