This tech company just added another big collaboration, striking a deal with NVIDIA, to use its UE emulation (UEE) to test NVIDIA’s 5G software solutions.
Keysight Technologies, Inc. (KEYS)
From Dow Theory Forecasts
Advancing a theme that has become more prevalent in our newsletter over the last few years, Keysight Technologies (KEYS) has built a robust business from a niche that barely existed a generation ago. The company provides software and tools for electronic design, testing, manufacturing, and installation of communications gear and networks, computer systems, and electronic equipment.
Keysight spun off from Agilent Technologies (A) in 2014, part of a move by Agilent to focus on its core health-care business. The child has done fine on its own, growing sales 47% (8% annualized) and per-share profits 57% (9% annualized) over the last five years. Per-share profits have risen at least 30% in each of the last eight quarters.
In fiscal 2019, the company generated $2.2 billion in revenue (51%) from communications, $1.1 billion (26%) from industrial electronics, and $1.0 billion (23%) from aerospace, defense, and government customers. Nearly one-fifth of the company’s revenue comes from recurring sources, a proportion likely to rise going forward as software (19% of 2019, revenue, up from 12% in 2015) gains importance at the expense of hardware. Keysight is the No. 1 player in its niche markets, with roughly 25% market share—up three percentage points from 2017. Given Keysight’s ability to grow faster than the broad market’s 3% to 5% rate, more share gains seem likely.
Keysight stands to benefit more than most from the global rollout of 5G wireless technology. As both traditional high-tech items and mainstream household products became more complicated and connected, Keysight’s communications unit responded by rolling out a steady stream of products. Orders rose 6% in the January quarter, and we expect demand for Keysight’s testing and analysis to remain strong. The company invested 16% of its revenue in research & development last year, up from 12% a year earlier.
The consensus projects sales growth of 7% and per-share-profit growth of 14% in fiscal 2020 ending October, followed by respective growth of 7% and 10% in fiscal 2021 and 10% and 15% in fiscal 2022. Estimates have risen since the company posted stronger-than-expected January-quarter results and raised its annual long-term growth targets to 4% to 6% for core revenue and greater than 10% for per-share profits. Keysight has exceeded the sales and profit consensus in seven consecutive quarters, but it would not be surprising to see the company lower near-term guidance to reflect the impact of the coronavirus on the tech sector.
The stock trades at 18 times trailing earnings, 7% below the industry median and 58% below its own three-year average price/earnings ratio. With a Quadrix Value score of 38, Keysight isn’t cheap but seems reasonably priced relative to its growth potential. Keysight, which scores above 75 in five of the seven Quadrix® categories, is a Buy and a Long-Term Buy.
Richard Moroney, CFA, Dow Theory Forecasts, www.dowtheory.com, 800-233-5922, March 16, 2020