Rating Update: Stock Rating A-Highest (10/17/19)-Keysight Technologies Inc (KEYS).

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BUSINESS

Keysight Technologies, Inc. provides electronic design and test solutions to communications and electronics industries internationally. Its Communications Solutions Group segment provides radio frequency and microwave test instruments and related software, and electronic design automation (EDA) software tools; oscilloscopes, logic and serial protocol analyzers, logic-signal sources, arbitrary waveform generators, and bit error rate testers; optical modulation analyzers, component analyzers, power meters, and laser source products, as well as optical amplifier, filter, and other passive component solutions; and related software solutions.
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INVESTMENT RATING

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KEYS’ future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.

Keysight Tech has a current Value Trend Rating of A (Highest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. Keysight Tech has a neutral Appreciation Score of 45 but a very high Power Rating of 95, producing the Highest Value Trend Rating.

Keysight Tech’s stock is selling below targeted value. The current stock price of $97.04 compares to targeted value 12 months forward of $107.
This neutral appreciation potential results in an appreciation score of 45 (55% of the universe has greater appreciation potential.)
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Keysight Tech has a Power Rating of 95. (This very high Power Rating indicates that KEYS has a better chance of achieving attractive investment performance over the near to intermediate term than all but 5% of companies in the universe.)
Factors contributing to this very high Power Rating include: the recent trend in KEYS’ earnings estimates has been extremely favorable; is in a strong phase current; and recent price action has been favorable.

INVESTMENT PROFILE

KEYS’ financial strength is high. Financial strength rating is 74.
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Relative to the S&P 500 Composite, Keysight Technologies Inc has both Growth and Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that KEYS is normal risk. Relative weaknesses include: high stock price volatility, low historical growth, and high earnings variability. KEYS’ valuation is high: low dividend yield, moderate P/E ratio, and high price/book ratio. KEYS has normal market capitalization.

CURRENT SIGNALS

Keysight Tech’s current operations are strong. Return on equity is rising, reflecting: and improving asset utilization.

Keysight Tech’s current technical position is very strong. The stock price is in a 3.7 month up move. The stock has appreciated 35.1% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Keysight Technologies Inc (NYSE: KEYS). Marginal positive changes in fundamentals have recently occurred: significant quarterly earnings acceleration occurred.
The stock is currently rated A.
Keysight Technologies Inc (NYSE: KEYS) stock closed at $3.11 on 10/17/19 after a major increase of 12.7%. However, unusually low trading volume at 50% of normal accompanied the advance. The stock has risen 2.6% during the last week and has been exceptionally strong relative to the market over the last nine months.

CASH FLOW

In 2018, Keysight Tech generated a significant increase in cash of +$97.0 million (+12%). Sources of cash were larger than uses. Cash generated from 2018 EBITDA totalled +$729.0 million. Non-operating uses consumed -$750.0 million (-103% of EBITDA). Cash taxes contributed +$611.0 million (+84% of EBITDA). Re-investment in the business amounted to -$110.0 million (-15% of EBITDA). On a net basis, debt investors received -$341.0 million (-47% of EBITDA) while equity investors withdrew -$42.0 million (-6% of EBITDA).
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Keysight Tech’s Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Keysight Technologies Inc Peer Group. (Since 2016 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, Keysight Tech was in the top quartile. Currently, Keysight Tech is lower quartile at -103% of EBITDA (-$750.0 million).

Keysight Tech’s Cash Taxes, %EBITDA enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Keysight Technologies Inc Peer Group. In most years, Keysight Tech was in the top quartile. Currently, Keysight Tech is upper quartile at +84% of EBITDA (+$611.0 million).

Keysight Tech’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Keysight Technologies Inc Peer Group. In most years, Keysight Tech was in the top quartile. Currently, Keysight Tech is above median at -15% of EBITDA (-$110.0 million).

Keysight Tech’s Debt Investors, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Keysight Technologies Inc Peer Group. In most years, Keysight Tech was in the second quartile and top quartile. Currently, Keysight Tech is substantially below median at -47% of EBITDA (-$341.0 million).

Keysight Tech’s Equity Investors, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Keysight Technologies Inc Peer Group. In most years, Keysight Tech was in the lower quartile. Currently, Keysight Tech is slightly above median at -6% of EBITDA (-$42.0 million).

Keysight Tech’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Keysight Technologies Inc Peer Group. In most years, Keysight Tech was in the top quartile. Currently, Keysight Tech is above median at +13% of EBITDA (+$97.0 million).
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Keysight Tech’s Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Keysight Technologies Inc Peer Group. (Since 2016 Cash, %Revenue has experienced a minor decline.) In most years, Keysight Tech was in the second quartile. Currently, Keysight Tech is above median at +24%.

PROFITABILITY

KEYS’ return on equity has eroded very significantly since 2012 although it experienced a very sharp recovery after the 2017 low.
A major analytical focus for KEYS is a very strong negative trend in pretax operating return a significantly offset by very strong positive trend in non-operating factors.
The productivity of KEYS’ assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend but it experienced a very sharp recovery after the 2017 low.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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KEYS’ return on equity is above median (10.6%) for the four quarters ended July, 2019.
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Operating performance (pretax return on assets) is lower quartile (-1.1%) reflecting asset turnover that is above median (0.67X) and lower quartile pretax margin (-1.7%).
Tax “keep” rate (income tax management) is lower quartile (-433.%) resulting in after tax return on assets that is substantially above median.
Financial leverage (leverage) is at median (2.16X).

GROWTH RATES

There are no significant differences between Keysight Technologies’ longer term growth and growth in recent years.
Keysight Technologies’ historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 2.4% per year.

Total asset growth has been 17.5% per year.

Annual E.P.S. growth has been -12.1% per year.

Equity growth has been 14.0% per year. (More recently it has been 26.0%.)

Keysight Technologies’ consensus growth rate forecast (average of Wall Street analysts) is 9.0% — above the average of the historical growth measures.
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Relative to the Keysight Technologies Inc Peer Group, Keysight Tech’s historical growth measures are highly erratic. Total asset growth (17.5%) has been upper quartile. Equity growth (14.0%) has been above median. Revenue growth (2.4%) has been substantially below median. E.P.S. growth (-12.1%) has been lower quartile.

Consensus growth forecast (9.0%) is substantially below median.
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PRICE HISTORY

Over the full time period, Keysight Technologies’ stock price performance has been highly stable and superior. Between December, 2014 and October, 2019, Keysight Technologies’ stock price rose +187%; relative to the market, this was a +97% gain. Significant price move during the period: 1) January, 2016 – October, 2019: +315%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 46.7% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through September, 2019 of 46.7% is upper quartile relative to Keysight Technologies Inc Peer Group.

Current 5-year total return performance is not available.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, KEYS’ overall valuation is quite high. The highest factor, the price/earnings ratio, is upper quartile. Price/equity ratio is near the upper quartile. Ratio of enterprise value/assets is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. The lowest factor, the ratio of enterprise value/revenue, is above median.
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Keysight Tech has a major value gap compared to the median. For KEYS to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 4.40X to 2.64X. If KEYS’ ratio of enterprise value/revenue were to fall to 2.64X, its stock price would be lower by $-40 to $57.
For KEYS to achieve upper quartile valuation relative to the Keysight Technologies Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 4.40X to 4.78X. If KEYS’ ratio of enterprise value/revenue were to rise to 4.78X, its stock price would increase by $9 from the current level of $97.

VALUE TARGETS

KEYS’ future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.
Keysight Technologies’ current Price Target of $106 represents a +10% change from the current price of $97.04.
This neutral appreciation potential results in an appreciation score of 45 (55% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 45, the high Power Rating of 95 results in an Value Trend Rating of A.
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Keysight Technologies’ current Price Target is $106 (+47% from the 2018 Target of $72 and +10% from the 10/17/19 price of $97.04). This dramatic rise in the Target is the result of a +12% increase in the equity base and a +31% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a very slight positive impact as well. Partially offsetting these Drivers, the forecasted decline in growth has a slight negative impact.
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PTR’s return on equity forecast is 32.5% — above our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2012 and 2018. The current forecast is significantly below the 2012 peak of 49%.

PTR’s growth forecast is 10.0% — slightly below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2012 and 2018. The current forecast is well above the 2015 low of 2%.

PTR’s cost of equity forecast is 10.4% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2012 and 2018. The current forecast is below the 2014 peak of 14.0%.
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At Keysight Technologies’ current price of $97.04, investors are placing a positive value of $63 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 12.0% per year, and a return on equity of 25.0% versus a cost of equity of 10.6%.
PTR’s 2020 Price Target of $106 is based on these forecasts and reflects an estimated value of existing assets of $51 and a value of future investments of $55.

About John Lafferty 52629 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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