Buyback Wednesdays – KLA Announces A Massive $6 Billion Buyback

Beyond the traditional benefits that stock buybacks offer, including reducing the size of the pie and a tax efficient way to return profits to shareholders, they also offer us insights into management’s capital allocation abilities. There are some companies that clearly should not be doing buybacks such as those with negative net income and negative free cash flows as well as those that are flush with cash at a cyclical peak. There are also companies where buybacks make a lot of sense because the stock is cheap and M&A opportunities scarce. These buybacks can provide a necessary catalyst to get the stock price moving in the right direction.

Our roundup of buybacks this week is an eclectic mix of large and small companies including ones that clearly should not be doing a buyback. A couple of significant announcements this week that did not make our top 5 list include announcements by managed healthcare company Centene Corporation (CNC) and TE Connectivity  (TEL) of $3 billion and $1.5 billion respectively. These represent around 6.7% and 4% of their market caps at announcement. The company that stood out the most was KLA Corporation (KLAC) with its $6 billion buyback announcement. KLA is a global company with over 13,000 employees focused on process control related to semiconductor manufacturing.

The company benefited significantly from the semiconductor cycle that took off before COVID accelerated the demand for semiconductors, as you can see from their revenue and free cash flow charts below. The company has $2.6 billion of cash on its balance sheet, $3.7 billion in long-term debt and generated $2.67 billion in free cash flow during the trailing twelve months.

During its fiscal Q3 2023 (ended March 2022), the company reported a 27% increase in revenue to $2.29 billion and beat earnings by 31 cents. The company is expected to grow revenue by 21% in its next fiscal year and sports best in class margins. I was surprised to see gross margin was 60.86% and net income margin was 36.41%. If the company can indeed deliver on its growth vision while maintaining margins, this buyback makes a lot of sense considering the stock trades at 11.4 times forward EBITDA and 15 times forward free cash flow. The key risk is that we may be at a cyclical peak for semiconductors with automotive manufacturers recently indicating that availability is no longer an issue. Growth might be harder to come by in the coming years at these margins.

The other interesting buyback announcement was the $2 billion buyback by Hertz, which I briefly discussed in this twitter thread.

Only plus or premium subscribers can access this post. Subscribe today.