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Bull of the Day: Keysight Technologies (KEYS)

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Keysight Technologies (KEYS - Free Report) is an $18 billion provider of electronic design, measurement and test instrumentation systems. Keysight emerged as a public company from the 2014 move by Agilent Technologies to split apart divisions.

KEYS provides specialized electronics solutions to dozens of industries including aerospace and defense, automotive and energy, telecommunications, government and education, and, of course, semiconductors.

And even though the company finds itself classified in the Zacks Electronics - Measuring Instruments industry, it is as much a software company. More on that coming up when I tell you about their recent key acquisition that rolls in AI-powered software test automation.

Keysight calls the top 25 technology enterprises in the world customers, and 78 of the Fortune 100, including Alphabet, Amazon, AT&T, Broadcom (AVGO - Free Report) , Boeing, Cisco, Microsoft, NVIDIA (NVDA - Free Report) , Samsung, Tesla (TSLA - Free Report) and Toyota.

A Turn In the Tide

I last wrote publicly about Keysight in late June when analysts had taken estimates down into the cellar of the Zacks Rank. But at the same time this became necessary to adjust after disappointing Q2 earnings due to the global pandemic shutdown, another trend stood out.

Keysight was busy inking deals, alliances and partnerships across every industry vertical they served. In May, June, and July, the company issued no less than 30 news items about their R&D and commercial developments in 5G technologies.

Then on August 13, Goldman Sachs analyst Mark Delaney upgraded Keysight Technologies to Buy from Neutral with a $120 price target as he assumed coverage of the stock. Test & Measurement stocks have historically been well correlated with earnings, and higher margins also correlate to better multiples, said Delaney, who sees Keysight benefiting from margin expansion and reduced volatility as its mix shifts toward Software and Services. He expects Keysight to benefit from both 5G, autonomous and electric vehicle tailwinds along with cyclical growth on a recovery in the industrial and auto end markets.

Big Beat & Raise Quarter

On August 21, KEYS delivered a strong beat and raise quarter, for their Q3 FY2020, and analysts were sent scrambling to raise estimates and price targets.

EPS of $1.19 beat the consensus of $0.84 by 42%. And revenues of $1.01 billion surpassed the consensus by a chunky 10%.

"Keysight delivered stronger-than-expected third quarter results as we ramped production capacity back to nearly 100% by quarter-end," said CEO/Chairman Ron Nersesian. He expects to rebound to positive Y/Y growth in both revenue and profits in the current quarter.

For Q4, the company is guiding to revenue of $1.17B-1.19B (above consensus for $1.09B), and EPS of $1.42-1.48 (well above consensus for $1.25).

Here were the analyst reactions, where all were immediately raising estimates and price targets...

Citi analyst Jim Suva raised the firm's price target on KEYS to $130 from $110 citing Keysight "materially" increasing estimates following the company's fiscal Q3 results. Suva was impressed by management guiding sales 6% above and earnings 17% above consensus following the July quarter beats of 10% and 43%.

Goldman Sachs analyst Mark Delaney raised his price target on KEYS to $127 from $120. Delaney noted that Keysight stated that the bulk of the 5G opportunity is still ahead, and millimeterwave commercialization is still in its early days. The analyst believes the company is executing well despite a difficult macroeconomic environment.

JPMorgan analyst Samik Chatterjee raised the firm's price target on KEYS to $135 from $129 and kept an Overweight rating on the shares. Chatterjee believes the company's fiscal Q3 results should turn out to be a share catalyst as the strong beat and upside to investor expectations relative to Q4 guidance reassures investors on both supply and demand.

Barclays analyst Tim Long raised the his price target on KEYS to $128 from $119 noting that sales are benefiting from a "steady demand recovery in a tough environment," but any weakness is being more than offset by strong operational execution and cost control.

Baird analyst Richard Eastman raised the firm's price target on KEYS to $112 from $105 also citing that sales recovered quicker than expected from the pandemic induced supply interruptions created during Q2. He said key growth areas continued to see solid order growth.

Stifel analyst John Marchetti and his team said that KEYS results and guidance reflect solid end-market demand across several growth markets -- 5G, defense modernization, 400G networking. Commercial communications rebounded better than expected and semiconductor test was strong, largely as a result of 5G, 400G and 5nm design activity. More macro-linked areas such as auto and general electronics were weaker, as expected, but the analyst believes should be sources of growth in 2021. The Stifel team maintained their $120 PT.

Following these reactions, the Zacks Consensus for FY20 (ends October) EPS rose over 10% from $4.20 to $4.63 and next year saw estimates go up 4% from $5.14 to $5.34. Granted the bulk of the EPS estimate bump for this year was due to the big Q3 beat, but the main theme is that the company has recovered from the global pandemic shutdown and is back on track in the 5G buildout and other key markets.

Big Innovation in Software, Automotive, & 5G

When I was researching KEYS in June, I discovered the acquisition of privately-held UK software firm Eggplant, for $330 million from The Carlyle Group (CG).

And I immediately thought that price for Eggplant was a steal for KEYS. I was surprised that CG didn't want to take Eggplant into an IPO to extract a larger exit for their investment.

In this tech-hungry stock market, even with only $38 million in sales in 2019, Eggplant might have priced at a $500 million market cap, at least, supporting a 15X price-to-sales ratio.

Let me share what Eggplant does and how it integrates with what KEYS already does...

Eggplant is an industry leading software test automation platform provider that uses artificial intelligence (AI) and analytics to automate test creation and test execution. Eggplant’s Digital Automation Intelligence platform can test any technology on any device, operating system or browser at any layer, from the user interface (UI) to application programming interfaces (APIs) to the database.

I look forward to the innovation that results from this integration of software testing magicians.

And in July management forged another key collaboration, this time in automotive communication systems that support ADAS. Here's an excerpt from the PR...

Keysight, IPG Automotive and Nordsys Collaborate to Accelerate Validation of Advanced Driver Systems

Will jointly deliver new modular test platform - Autonomous Drive Emulation (ADE) Platform

SANTA ROSA, Calif.; KARLSRUHE, Baden-Württemberg; BRAUNSCHWEIG, Lower Saxony, July 27, 2020

Keysight Technologies, Inc. (NYSE: KEYS), a leading technology company that helps enterprises, service providers and governments accelerate innovation to connect and secure the world, IPG Automotive , a global leader in virtual test driving technology and Nordsys, one of the leading companies for the development of software system architectures for vehicle-to-everything (V2X) communication, are collaborating to design and develop a modular test platform that will accelerate the validation of advanced driver-assistance systems (ADAS) and functions for autonomous driving.

The automotive industry is facing tremendous change and multiple technology disruptions. The number of sensors and quantity of data that needs to be processed by the decision-making units in ADAS-enabled cars is driving increased complexity in development, simulation and testing. In addition to the complexity associated with the technical limitations of various sensor emulation implementations, is the integration into a complete and comprehensive environment due to the lack of standard interfaces.

Keysight, IPG Automotive and Nordsys have established a multi-year collaboration to create a solution – the Autonomous Drive Emulation (ADE) platform - which will emulate synchronized connections to all relevant sensors in a car such as the global navigation satellite system (GNSS), vehicle to everything (V2X) camera and radar, in a single system.

(end of July 27 PR excerpt)

Then just this week, KEYS announced that the company is working with Qualcomm Technologies, a subsidiary of QUALCOMM (QCOM - Free Report) , and SGS to help advance testing of cellular vehicle-to-everything (C-V2X) technology.

Finally, August had its own flurry of 5G news including the announcement that Jabil has selected Keysight's 5G device test solutions to address the demand for 5G product validation in design and manufacturing.

Big Buyers in Q2

Every quarter, I go over the SEC 13F filings to see who's buying and selling the stocks I'm most interesting in. Here's what stands out to me about the largest holders who were adding to KEYS in Q2:

1. BLACKROCK I would normally ignore because they are so enormous and have so many entities to allocate to, but a 25% increase in the position is significant -- especially as the 2nd-largest holder by far at nearly equal the 21 million shares of the next six holders combined, after adding 4 million shares in Q2. And Vanguard remains the largest holder with 21.5M shares.

2. MACKENZIE FINANCIAL is a $40 billion fund out of Toronto with a 26.5% concentration in Finance and only 19% to Tech. Seem like value players. They increased their KEYS position by 90% to cross 3 million shares.

3. SWEDBANK is a Nordic-Baltic banking group based in Stockholm, Sweden, offering retail banking, asset management, financial, and other services. They initiated a 1.9 million share buy as a big new position in KEYS in Q2. In 2019 Swedbank had 900,000 private and 130,000 corporate clients and a 60% market share of Estonia’s payments. The primary investment fund has AUM over $30 billion with a whopping 55% concentration in Tech.

4. Finally, CALPERS added 1.15M shares of KEYS, which was a big 272% jump from a prior small position. They will probably be around a while in this trade as their Silicon Valley sources explain how San Diego and the Bay Area are the testing grounds for the 5G rollout.

Bottom line: I think buying KEYS shares inside $90-95 is a great long-term opportunity in a key player of advanced electronics, communications, transportation, and automation.

Disclosure: I own KEYS shares for the Zacks TAZR Trader portfolio.

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