4 Reasons Keysight Could Soar Over $100 Per Share

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About: Keysight Technologies, Inc. (KEYS)
by: Lukas Wolgram
Summary

Keysight is already translating 5G success into bottom line profits.

Keysight is a diversified business with no single customer making up more than 10% of total revenue, and no single business segment making up more than half of total revenue.

Q3 2019 was an excellent quarter for the company.

The valuation seems reasonable, and perhaps attractive, for a company growing earnings 40% in 2019.

This article describes the four reasons I think Keystone shares could keep the gains going.

Introduction

Keysight Technologies (KEYS) is a manufacturer of electronic equipment and developer of related software. The company sells its products to the commercial communications, networking, aerospace, defense and government, automotive, energy, and semiconductor industries. The company was originally a part of Hewlett-Packard (HP) before being spun-off into Agilent (A) in 1999. Keysight was formed in 2014 in another spinoff from Agilent. Since then, Keysight shareholders have done very well. The company has thrived since the spinoff, increasing in price by over 250% in less than 5 years and outperforming the S&P500 by a very significant margin.

Chart Data by YCharts
Chart Data by YCharts

Source: Keysight Technologies Website

Past performance is not indicative of future returns, but I don't believe Keysight is done yet. Here are four reasons why I think Keysight could continue to outperform.

Reason No. 1: 5G

If you haven't heard of 5G, you're probably living under a rock. 5G networks allow for much faster wireless internet connection speeds. With more devices using wireless networks than ever before and many devices requiring refreshes to take advantage of 5G, there will be many potential device upgrades. Keysight recognizes this and has so far taken full advantage of the move to 5G.

In the Q3 conference call, Keysight management described 5G as a key driver of growth for the Communications Solutions segment of the business. This segment grew revenue 13% in Q3 year over year and grew operating income nearly 60% to $190M from $120M in the quarter 1 year ago. The rollout of 5G is just beginning around the world and I believe significant opportunities and growth remain.

Management also announced in the fiscal Q3 call that they are acquiring a company called Prisma Telecom Testing. CEO Ron Nersesian said, "A good way to think about Prisma is very similar to Anite, where it has capability to help us move forward in the software layers to leverage our overall 5G and communication solutions".

The company is clearly capitalizing on 5G and already it is translating into direct increases in the bottom line. This should remain a solid area of growth for the company for quite some time.

Reason No. 2: Diversified Revenue Streams

Keysight derives revenue from four main segments, although they sometimes combine commercial communications and aerospace, defense and government. The main point is not lost, however. The company is well-positioned to remain steady should any headwinds hit a part of their business, such as Ixia recently. In the company's most recent 10-K for 2018, they stated that no single customer accounted for more than 10 percent of total revenue, and as we can see from the earnings slide below, no single segment accounted for more than 50% of total revenue.

Source: Q3 Earnings Presentation

As Keysight makes more acquisitions, their revenue will balance out further. While this can dampen total growth overall as compared to growth in any one segment, it can also smooth out bumpiness in the long run. This should be attractive for more conservative growth investors. Not all of the company's eggs are in one basket.

Reason No. 3: Upgrades After Guidance Raise in Q3

In Q3 2019 Keysight beat expectations and raised guidance for full fiscal 2019. Management raised guidance to revenue growth of 9-10% and earnings growth of 40-42%. Analysts were quick to upgrade the stock and raise price targets.

The stock jumped to a new all-time high on this news to a little over $100 before consolidating between $92 and $100 per share. If we see the market do well over the next couple of months the positive momentum could, in my opinion, bring shares up over $100.

Source: Thinkorswim

Reason No. 4: Valuation - A Combination of Growth And Value

Keysight isn't the cheapest of their competitors but is also not the most expensive. At 40% earnings growth, a 21 forward earnings multiple is definitely attractive. Keysight's growth seems to be reflected in EV/EBITDA more than a straight P/E ratio, but neither are indicative of a company growing earnings at 40% per year. While I must say it's unlikely earnings growth will stay this high, I do believe the company will continue to increase earnings at a greater pace than revenue.

Chart Data by YCharts
Chart Data by YCharts

Keysight's balance sheet is also looking good. As of July 31, 2019 the company had $1.4 billion in cash. While they also had $1.3 billion in long term debt and $500 million in short term debt, estimated earnings of around $230 million in fiscal 2019 combined with the cash balance should make this debt level manageable. Netted out for cash, debt remains at less than two times annual earnings. This is by no means unreasonable.

Conclusion

Keysight is a company already benefiting on the bottom line from 5G, and yet 5G remains a significant opportunity for the company as the technology is only just beginning to roll out. The next few years will see large advances in the use of 5G, and Keysight should be able to capitalize on it.

Keysight reported very good earnings in Q3 and is looking to carry that momentum into the last quarter of the year. If they can successfully continue to put up good numbers, I think shares could see low to mid $100s.

Keysight's valuation, while not a steal, does seem to be reasonable. They are right there with competitors who are not growing earnings as quickly. The company is solid and executing well.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.