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Technology Stocks : KLA-Tencor Corporation (KLAC) -- Ignore unavailable to you. Want to Upgrade?

To: Forrest Lee who wrote (1127)	4/27/1998 11:18:00 PM
From: macaluso	Read Replies (2) \| Respond to of 1779

<Picture: Tech Periscope> Chip grader By Stephen S. Johnson <Picture: I>n the light of softening demand for computers, whether because of weaker Asian demand or Compaq's oversupply problems, you might think it best to stay away from the chip business for a while. Not so fast. Consider KLA-Tencor Corp. (KLAC), the $1 billion (revenues) maker of automated testing equipment for the semiconductor industry. After hitting a high of $76.88 last August, KLA's stock sank to a 12-month low of $33.38 in January. Now trading in the high 30s--a 10% discount to the S&P 500--KLA represents excellent long-term value for technology investors, says NationsBanc Montgomery Securities analyst Brett Hodess. With chip prices on a decline, the only way chipmakers can realize profits is by improving yields and reducing factory floor losses. KLA makes products that monitor the chipmaking process and are used to find defects and improve yields. Also known as wafer inspection systems, these products account for more than 50% of sales, and are essential to the chipmaking process. (KLA acquired this all-important technology when it bought rival Tencor last year.) The chip market may wax and wane, but the chipmakers constantly need to find new ways to improve their equipment. KLA is virtually alone in this business. Its closest competitor, Applied Materials, is a relative newcomer in the chip-testing business, having entered it by way of acquisitions. KLA sells some 45% of its wares to Asia. Cause for concern? Although capital costs throughout the region were slashed significantly, Korea, for example, paid its bills to KLA in the fourth quarter of 1997, says Hodess. At the same time, while sales to Korea declined, this was offset by increased sales at home, allowing KLA to hold its 54% gross margins intact. And even with the impact of the Asian crisis, KLA's second-quarter earnings (ended Dec. 31, 1997) of 59 cents a share were 48% higher than a year earlier. The only uncertainty is Japan. Japan's capital budget is released in April and like its neighbors, its capital spending may be down by as much as 30%. Will this hurt the stock? Doubtfully, says Hodess, as the possibility of lower spending in 1999 has likely already been factored into KLA's stock price. KLA will also benefit from new products. Its ADC software, which automatically classifies defects on its inspection systems, is now being deployed by 16 of its 18 largest customers. Hodess also expects KLA's earnings to jump 30%, to $2.22, for the year (fiscal year ends June 1998). For 1999, Hodess anticipates earnings to come in at $2.90. With these earnings, he thinks the stock could trade at $52 by the end of this year and above $60 within 18 months. <Picture: Comments? 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