KLA-Tencor (KLAC) Q4 Earnings: Is A Surprise In The Cards?

KLA-Tencor Corporation (NASDAQ:KLAC) is set to report fourth-quarter fiscal 2017 results on Jul 27 after the bell.

The company has a Zacks Rank #2 (Buy) and an Earnings ESP of 0.00%, a combination that complicates surprise prediction. This is because per our proven model, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) to beat estimates.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

However, KLA-Tencor’s surprise history has been pretty impressive. It surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat of 11.55%.

KLA-Tencor’s shares have returned only 26.96% year to date, underperforming the industry’s 41.92% rally.

What Happened in the Second Quarter?

The company’s earnings per share (EPS) and revenues exceeded the Zacks Consensus Estimate. Revenues and earnings grew 28.4% and 43.8% year over year, respectively, driven by strong demand in wafer fab equipment market and customer acceptance for the company’s new products.

Expectations for the Fiscal Fourth Quarter

We expect strong demand for more efficient manufacturing processes and preference for mobile to work in favor of the company. The technical complexity of manufacturing semiconductors and increasingly challenging yield issues remain revenue drivers for this leading manufacturer of process control equipment.

Given that each system is high valued, customer concentration is obviated, which results in significant fluctuations in revenue/orders in times of uncertain demand.

For the fourth quarter, KLA expects shipments of $890–$970 million. Quarterly revenues are expected between $885 million and $945 million. Non-GAAP EPS is expected in the range of $1.46–$1.66.

Bottom Line

KLA’s comprehensive product line, cost-reduction initiatives and strong balance sheet remain positives that will generate growth whenever cyclical pressure permits. Although competition and a concentrated customer base increase execution risk, accelerated process control spending across foundry, memory and logic players through 2017 and beyond will enable KLA to deliver stronger results. This therefore holds true for the soon-to-be reported quarter.

Stocks to Consider

Here are a few stocks which you may consider instead, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Cypress Semiconductor Corporation (NASDAQ:CY) , with an Earnings ESP of +11.11% and Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lam Research Corporation (NASDAQ:LRCX) , with an Earnings ESP of +1.33% and a Zacks Rank #1.

Fortive Corporation (NYSE:FTV) , with an Earnings ESP of +2.90% and a Zacks Rank #2.

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