Had lots of client work yesterday, so apologies that this is coming on a Thursday instead of a Wednesday. This week we look at Keysight’s earnings and talk a bit about what is going on there.
Keysight announced revenue of $679M, with Net Income of $64M leading the $0.37 per share of earnings. Revenue was slightly higher and earnings were slightly lower than the same time a year ago. Essentially, the company is flat. On top of that, what the company talks about is that its market is approximately flat as well. There are single digit upticks and downticks here and there. They are shifting things from one product line or another. But the questions on the call were all about specific technical and market issues.
The one thing that stood out was the $200M buy back that was announced. I want to walk through what this is and why they might do it. The Board of Directors has told the company that they can spend up to $200M and by Keysight stock. Given that the company is worth over $4.5B, this is actually less than 5% of the stock. Technically it doesn’t change the value of the company (you take $200M of stock out of the market and spend $200M to do so). Practically, it sets a floor to the stock price. The Board will have advised the company at what price they think the Company should be buyers. Keysight will really only buy stock at that price. Given that the stock today is just about $26.75 per share, let’s say they said “Buy at $25”. That means that orders will go onto the market if the stock dips below $25. Given the laws of supply and demand, that says that the stock will not likely go below $25 unless something unusual happens.
The question is, “Is this the best way to spend $200M for shareholders?” Well, what are the other ways to spend the money:
1 – Buy a company or a division of a company – This is called Inorganic Growth.
2 – Spend the money on new products within the company – This is called Organic Growth.
3 – Give the money back to the shareholders as a dividend – Special (1 time) or Regular (eveny quarter).
Well, since they are not spending the money on growth the company is signaling that it does not see an effective way to spend the money. It did a purchase last year (Anrite) so it is not adverse to Inorganic Growth. So if you are expecting significant revenue growth, Keysight is telling you not to expect it. What I have advocated for is for Keysight to adopt a regular dividend. The company generates cash every quarter and could give some of that to shareholders. For example, a dividend of $0.25 per share per quarter is well below the current earnings and give the company a chance to have cash reserves for the future. Why is this a better solution to me? A buy back is a short term response. It says “Hey we are undervalued and we don’t want to get so low that either our shareholders run away or somebody buys us.” The reality is that they are at a Price to Earnings (P/E) Ratio of about 10. Given the outlook, this seems about right for the business. I can imagine the P/E getting to 15 if long term revenue growth is restored. But that seems a stretch given the low growth markets that the company is in. So, a buy back is not really going to adjust the stock price upward. It just tries to prevent it going down. However, a dividend let’s the stockholder to decide what to do with the money. Why do I want my cash tied up by guys that can’t deploy it for growth? That would provide value back to the shareholders immediately and allow the company to be what it is – a stable high tech business.
Good luck and have a great day!
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