KLA-Tencor ( KLAC ) announced that it has agreed to acquire Orbotech Ltd. ( ORBK ) to diversify its core business. Its acquisition price stands at about $69 per share through a combination of cash and stock. Our valuation dashboard suggests that KLA-Tencor is offering an attractive price, but given the growth potential of Orbotech and the likelihood of realizing synergies, the deal seems fair. To understand its valuation better, we have created an interactive dashboard that shows how changes in its segment revenues, margins, and P/E multiple can impact Orbotech's valuation.
Our price estimate of $68 is based on expected overall revenue of $1 billion in FY 2018 and a P/E multiple of 21.5x. We expect Orbotech's net income margin to improve to 15.3%, from 14.7% in FY 2017, as a result of strong demand from the smartphone, television, & automotive sectors, as well as a lower tax rate. The 15% margin would imply net income of $154 million.
We expect Orbotech revenue to grow by nearly 13% to reach $1.01 billion in 2018, driven by strong performance in the PCB, FPD, SD segments. We expect the PCB segment to grow driven by increasing demands for complex and multilayer printed boards from the smartphone and the auto industry, with increased adoption of hybrid and electric vehicles, coupled with additional safety features in driver assistance and autonomous vehicles. Meanwhile, the ongoing shift from LCD to flex OLED in the smartphone and television industry should drive the FPD segment, in addition, the deal with LG Display to supply flex OLED displays will further boost this segment. The increasing functionality of smartphones with the introduction of AR/VR, expanding 4G and emerging 5G wireless infrastructure, and increased adoption of hybrid and electric vehicles will boost the demand for radio frequency ( RF ) devices, thereby driving growth in the SD segment.
Our valuation methodology above suggests that KLA-Tencor is paying a reasonable price for Orbotech, as its counterparts in the U.S., are trading at P/E multiples between 16 and 31.
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