Before the Thanksgiving Holiday, our friends at Keysight reported their earnings. I thought I would talk about Keysight’s results and then add in some thoughts about this kind of company within your portfolio.
To be clear, Keysight was reporting 4th Quarter results. This is because it ends its Fiscal Year at the end of the 3rd Calendar Quarter. The company reported $756M Revenue and $122M of Net Income (both non-GAAP). The company expects to have Revenue around $725M and earnings of around $0.50 per share in Q1. In general, these numbers are flat to slightly down from previous years. Although the company expects it’s total addressable market (TAM) to grow 2% next year and to grow 3% itself. This means it is taking a small amount of market share away from it’s competitors.
The company has been relatively flat since the announcement and the stock has been relatively flat to down over the past year. Keysight spent the vast bulk 1st 1/2 of the last year above $34 per share and the bulk of the 2nd half below that number.
So, here is the thing. Why would you invest in Keysight? The truth is that I have no idea. The company is clearly a technology company. Look at the press releases and you will see many very high technology parts of their portfolio. But from an investor point of view, who cares? When I was at AFC our CFO (Keith Pratt) used to do a class for employees called Investing 101. One of his first comments is that investors don’t care if you make DLC’s or Donuts. Because they are looking for a return on their investment. And that is the problem at Keysight. How an investor will earn an ROI is unclear. There are two possible ways: Keysight’s stock price can go up or Keysight can issue a dividend.
Let’s talk about the first. What would drive Keysight’s stock price up is growth in earnings. The problem is that Keysight is always talking about these things in single digit quantities. We can get that kind of growth from things like Proctor and Gamble or Coca-Cola. It means that Keysight is not going to earn a strong Price to Earnings ration (P/E Ratio – Divide the Stock Price by the Earnings per Share). Right now the P/E ratio hovers at about 10. If Keysight could predict more earnings and long term growth, then the Stock Price would go up. Alternately, the company could use some of its cash to buy back shares. Keysight closed 2 acqusitions. It paid $600M for Anite and an undisclosed sum for Electroservices. Instead of doing that it could have bought Keysight stock. Theoretically by spending the $600M on Keysight stock the price would have gone up 10% and that would have been a better deal for investors.
The second is easy. The company generates signficant cash in the quarter. It needs some to pay down its debt, but it could give much of the rest to shareholders. This kind of dividend would over time give back the money to the investors, since value of the stock is not.
Either way, right now holding Keysight in your investment portfolio is like having cash – except that it might go down in value. It is unclear on why anyone would want to put this in their portfolio until Management announces a plan to build a return to its investors.
Have a great week!
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