Over the past six months, Keysight has been a great trade, beating the S&P 500 by 14.8%. Its stock price has climbed to $172.71, representing a healthy 24.1% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Keysight, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Despite the momentum, we don't have much confidence in Keysight. Here are three reasons why there are better opportunities than KEYS and a stock we'd rather own.
Why Do We Think Keysight Will Underperform?
Spun off from Hewlett-Packard in 2014, Keysight (NYSE:KEYS) offers electronic measurement products for use in various sectors.
1. Backlog Declines as Orders Drop
In addition to reported revenue, backlog is a useful data point for analyzing Inspection Instruments companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Keysight’s future revenue streams.
Keysight’s backlog came in at $2.36 billion in the latest quarter, and it averaged 3.5% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation. 
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Keysight’s EPS grew at an unimpressive 5.8% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 2.9% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Keysight’s margin dropped by 3.3 percentage points over the last five years. If its declines continue, it could signal higher capital intensity. Keysight’s free cash flow margin for the trailing 12 months was 18%.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Keysight, we’ll be cheering from the sidelines. With its shares topping the market in recent months, the stock trades at 24.6× forward price-to-earnings (or $172.71 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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