KEYS Stock Study (8-6-24)

Posted by Mark on September 29, 2024 at 07:01 | Last modified: August 7, 2024 11:09

I recently did a stock study on Keysight Technologies Inc. (KEYS) with a closing price of $122.81.

M* writes:

     > Keysight Technologies is a leader in the field of testing
     > and measurement, helping electronics OEMs and suppliers
     > alike bring products to market to fit industry standards
     > and specifications. Keysight specializes in the
     > communications market, but also supplies into the
     > government, automotive, industrial, and semiconductor
     > manufacturing markets. Keysight’s solutions include
     > testing tools, analytical software, and services. The
     > firm’s stated objective is to reduce time to market and
     > improve efficiency at its more than 30,000 customers.

Spinning off from Agilant after FY 2014, the first few years were rough. I am excluding 2017 from the full analysis pursuant to 2017 Form 10-K:

     > Net income was $102 million in 2017 compared to net
     > income of $335 million and $513 million in 2016 and 2015,
     > respectively… The decline in net income for the year ended
     > October 31, 2017 is primarily driven by the unfavorable
     > impact from amortization of acquisition-related balances.

Since 2015, the medium-size company has grown sales and EPS at annualized rates of 9.2% and 16.3%, respectively. Lines are mostly up, straight, and parallel (especially following ’18) except for a sales dip in ’20 and EPS dips in ’16, ’18, and ’23. Five-year EPS R^2 is 0.87 although Value Line gives an Earnings Predictability score of only 50 (probably including more than the last five years).

Since 2015, PTPM is roughly even with peer and industry averages while increasing from 13.6% to 24.8% (’23) with a last-5-year mean of 20.7%. ROE leads peer and industry averages despite falling from 46.2% to 21.1% (’23) with a last-5-year mean of 22.3%. Debt-to-Capital is higher than peer and industry averages despite falling from 45.8% to 30.3% (’23) with a last-5-year mean of 34.5%.

M* reports Quick Ratio of 1.2, Interest Coverage of 14.5, and assigns a “Wide” Economic Moat. Value Line gives an A grade for Financial Strength.

With regard to sales growth:

• YF projects YOY 9.9% contraction and 6.9% growth for ’24 and ’25, respectively (based on 12 analysts).
• Zacks projects YOY 10.0% contraction and 5.5% growth for ’24 and ’25, respectively (4 analysts).
• Value Line projects 4.2% annualized growth from ’23-’28.
• CFRA projects contraction of 10.2% YOY and 1.4% per year for ’24 and ’23-’25, respectively.
• M* gives a 2-year annualized ACE of 0.9% contraction.

I am forecasting flat sales due to three estimates of near-term contraction.

With regard to EPS growth:

• MarketWatch projects 5.8% contraction and 4.7% growth per year for ’23-’25 and ’23-’26 (based on 13 analysts).
• Nasdaq.com projects growth of 8.8% YOY and 12.8% per year for ’25 and ’24-’26 (5/5/3 analysts for ’24/’25/’26).
• Seeking Alpha projects 4-year annualized growth of 0.6%.
• YF projects YOY 28.7% contraction and 17.7% growth for ’24 and ’25 and 5-year annualized contraction of 3.4% (11).
• Zacks projects YOY 28.3% contraction and 16.4% growth for ’24 and ’25 and 5-year annualized growth of 5.5% (6).
• Value Line projects 4.8% annualized growth from ’23-’28.
• CFRA projects contraction of 28.8% YOY and 7.0% per year for ’24 and ’23-’25 along with 3-year CAGR of 7.0%.
• M* projects long-term annualized growth of 7.5%.

I am forecasting in lower end of the long-term-estimate range (mean of five: 3.0%). Initial value is ’23 EPS of $5.91/share.

My Forecast High P/E is 30.0. Since 2015, high P/E increases from 13.0 to 32.1 (’23) with a last-5-year mean of 33.9 and a last-5-year-mean average P/E of 27.2. I am below the last-5-year range.

My Forecast Low P/E is 16.0. Since 2015, low P/E increases from 9.5 to 20.1 (’23) with a last-5-year mean of 20.5. I am forecasting below the last-5-year range.

My Low Stock Price Forecast (LSPF) of $94.60 is default based on initial value given above. This is 23.0% less than the previous close and 20.2% less than the 52-week low.

These inputs land KEYS in the HOLD zone with a U/D ratio of 1.9. Total Annualized Return (TAR) is 7.6%.

PAR (using Forecast Average—not High—P/E) of 2.1% is less than I seek for any size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 8 studies (my study and 2 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 4.5%, 9.9%, 31.3, and 20.0, respectively. I am lower across the board. Value Line’s projected average annual P/E of 21.5 is not only lower than MS (25.7) but mine as well (23.0).

MS high / low EPS are $7.59 / $4.79 versus my $5.91 / $5.91 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $10.50 soars above both.

MS LSPF of $102.50 implies a Forecast Low P/E of 21.4: more than the above-stated 20.0. MS LSPF is 7.0% higher than the default $4.79/share * 20.0 = $95.80 resulting in more aggressive zoning. MS LSPF is also 8.6% greater than mine.

With regard to valuation, PEG is 3.9 per Zacks: quite expensive. Relative Value [(current P/E) / 5-year-mean average P/E] is fair at 0.99.

I believe MOS is healthy but not robust. My inputs could be less despite being toward the bottom of analyst/historical ranges. Growth forecast is zero (but not negative). Forecast P/E range is below that of the last 5 years (but not more). Initial value is not a lower 2024 Q1 or Q2 EPS (the latter would be an additional 20%+ discount, which may be unreasonably extreme).

KEYS is a BUY per U/D under $115/share. BI TAR criterion is met ~$89 given a forecast high price ~$177.

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