Why Are Analysts Bullish on KLA (KLAC)?

It was a strong week for KLA Corporation. Its shares are now trading at $397.59, marking a 6.5% change on Friday compared to Thurdsay's close. An analyst favorite, the Semiconductor Equipment & Materials company has a rating of buy. But could the market and the analyst community be overvaluing this stock?

The most common valuation metric for stocks is the trailing price to earnings (P/E) ratio. KLA has a P/E ratio of 33.4 based on its 12 month trailing earnings per share of $11.91. Considering its future earnings estimates of $16.9 per share, the stock's forward P/E ratio is 23.5. In comparison, the average P/E ratio of the Technology sector is 26.5 and the average P/E ratio of the S&P 500 is 15.97.

We can also compare the ratio of KLA's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present liquidation value -- or what would be left if the company sold off all its assets and paid off all of its debts today. Importantly, the book value does not include intangible assets such as the value of its brand and the goodwill of its customers. KLAC has a P/B ratio of 19.6, with any figure close to or below one indicating a potentially undervalued company.

A comparison of the share price versus company earnings and book value should be balanced by an analysis of the company's ability to pay its liabilities. One popular metric is the Quick Ratio, or Acid Test, which is the company's current assets minus its inventory and prepaid expenses divided by its current liabilities. KLA's quick ratio is 1.532. Generally speaking, a quick ratio above 1 signifies that the company is able to meet its liabilities.

At Market Inference, we will keep monitoring KLA to see if the analysts were right to recommend the stock despite its valuation issues. We recognize that numbers don't always tell the whole story, and that qualitative factors often set high performing investments apart from the rest.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.