2023-11-20 18:28:57 ET
Summary
- Keysight Technologies, Inc. reported a fiscal Q4 top and bottom line beat.
- Despite a tough year, the company achieved record revenue, gross margins, and operating margins.
- The stock is down due to cautious commentary and a difficult macro situation, but it is now seen as a value tech play.
- The semiconductor space has troughed, and customer spend here is likely a hidden catalyst for Keysight in 2024.
One of the names we have traded a number of times is Keysight Technologies, Inc. ( KEYS ). Make no mistake, it has been a tough year for the stock, but when it got to $120 we started turning bullish for a run up.
Shares are up a few percentage points from our recent bullish view, but we wanted to wait for fiscal Q4 earnings in case the report gave us pause and reason to think the stock could dip lower. Should shares dip on the just-reported earnings , then so be it, but we view shares as a buy.
Let us discuss the just-reported results.
First, we saw a top and bottom line beat against consensus . The consensus bar was set to be beat in our estimation, but the degree of the beat on earnings was moderately large, given that revenues were essentially in line.
In our opinion, Keysight delivered a strong ending to its fiscal year with these fiscal fourth quarter results . Despite the fact that the stock has been crushed all year, Keysight finished off the year with record revenue, record gross margins, and record operating margins. So why is the stock down? Well, the company has been cautious most of the year in its commentary, and the macro situation has been difficult. In fact, most of the guides had come in slightly meek compared to consensus expectations. And, of course, growth had been slowing. However, we see this as a value tech play now at these levels.
While the overall "value" rating is average, we see strong attractiveness on a simple earnings multiple, as well as on enterprise value to EBITDA metrics. Further, the price to cash flow makes the stock a value proposition in the space. Of course for average value, we are getting about average growth as well. And that is ok at these levels, and this is why we think it is time to start buying Keysight Technologies again, before a ramp up over the next year which we see as likely.
Now the quarter saw sales down from last year, with revenue of $1.31 billion, compared with $1.44 billion last year. However, this beat estimates by $10 million. But for the fiscal year, revenues were up about 1% to $5.46 billion. That is strong. We think the slowdown is temporary, as we await a macro recovery to boost demand. We like buying ahead of that. GAAP net income was $226 million, or $1.28 per share, while adjusted EPS was $1.99 which beat estimates handily by $0.12. There was some weakness in commercial communications, but growth in aerospace and government sales. For their electronic innovations, there was a bit of contraction in semiconductor and manufacturing-related customer spending, but we think the semiconductor cycle has troughed and expect this spend to ramp up again in 2024. Meanwhile, the company noted "investment in new mobility automotive, advanced research, and digital health" had remained "steady." We view this as positive overall.
Now here is the deal. Despite the contraction in sales and in GAAP earnings, cash flow was strong. Cash flow from operations was $378 million, compared with $398 million last year. However, free cash flow was $340 million, in line with the $340 million in Q4 2022. Yet shares are down some 20% from a year ago despite comparable cash flow performance. Why? Because of the slowdown in the growth. Still, Cash flow from operations for the year was $1.41 billion, compared with $1.14 billion last year. Free cash flow was up dramatically to $1.21 billion, compared with $0.96 billion in fiscal year 2022. We like this growth and think it's time to buy.
As we look ahead, the company has a strong balance sheet . Cash and cash equivalents totaled a strong $2.47 billion. This comes as long-term debt is down to $1.2 billion from $1.8 billion a year ago. Thus, we have a net cash position. This is a benefit. Once again, however, we believe the guide for its fiscal Q1 was a bit of an under-promise and overdeliver target. The company is targeting sales to be $1.235 billion to $1.255 billion but this is below consensus of $1.25 billion at the midpoint. The EPS guide was well below consensus, reflecting a very cautious outlook. EPS was guided at $1.53 to $1.59., vs. consensus of $1.68.
If the stock rallies on this news, this could mark a bottom, because the guide is pretty weak, all things considered. But stocks bottom on bad news. The quarter itself was pretty positive. We see the guide as more than attainable. While the $8.33 in EPS this fiscal year was above consensus, our current view is for flattish earnings in 2024. However, if we see a semiconductor customer spending ramp up as we are expecting as the industry emerges from a trough, then our expectation, and likely that of Keysight's generally conservative views offered, are likely to be beaten.
Given the precipitous decline in Keysight Technologies, Inc. shares, and to some degree warranted on slowing performance, we are at attractive valuation levels overall. Cash flow is strong. The balance sheet is sound. We rate shares a buy.
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We Still Like Keysight Technologies