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Keysight Technologies: High Quality Long Term Compounder

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Summary

  • Keysight Technologies is a high quality company that benefits from some of the biggest themes in investing.
  • The company is in strong financial shape and is well positioned to grow.
  • Valuation is the only challenge to owning the stock.

Keysight Technologies (NYSE:KEYS) is a high quality company that benefits from some of the biggest themes in investing, including 5G, electric & autonomous vehicles, and China. I'm bullish on the company long term, with only valuation giving me pause. In this article, we will explore the company's business, exposure to major themes, market, strategy, financials, valuation and risk factors. By the end of this article, readers should have a solid foundation on which to develop their own investment views.

Electronic design, test automation & measurement equipment | Keysight

Source: Keysight.com

Business

KEYS sells electronic measurement instruments and systems, software and software design tools used to make electronic equipment, and services related to its products.

KEYS spinoff from Agilent (A). The company was incorporated in 2013 and went public in 2014 after a series of divestitures. It is a notable positive that KEYS's senior management team came from Agilent and have decades of experience working with each other.

As a public company, it has been acquisitive. For example, in April 2017, it acquired Ixia and in August 2015, it acquired Anite. Today, the company operates under two segments: Communication Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG).

Segments

The CSG segment is ~75% of total revenue and is expected to grow 11.4% in FY21 (ending October). There are two subsegments: Aerospace, Defense & Government (ADG) and Commercial Communications (CC).

The ADG subsegment, ~21% of total revenue, is mostly tied to defense and to a lesser extent aerospace applications such as satellites. Defense companies like Lockheed Martin (LMT) and Northrop Grumman (NOC) have traded poorly due to concerns over the defense budget, which may be pressured by the rising budget deficit and national debt. However, defense companies, including KEYS, believe the budget will likely grow to address the great power competition with China and Russia.

The CC subsegment, ~54% of total revenue, gets

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