Wedgewood Partners, a St. Louis, Missouri-based investment management firm, released its Q1 2020 Investor letter – a copy of which is available for download here. Wedgewood Partners returned -16.30% for the first quarter. Meanwhile, the benchmark Russell 1000 Growth Index and the S&P 500 Index lost 14.10% and 19.60%, respectively.
In the said letter, Wedgewood Partners highlighted a few stocks and Keysight Technologies Inc. (NYSE:KEYS) is one of them. Keysight Technologies manufactures electronics test and measurement equipment and software. Year-to-date, KEYS stock lost 5.3% and on April 29th it had a closing price of $98.91. Its market cap is of $18.2 billion. Here is what Wedgewood Partners said:
“Keysight is the largest developer of software and hardware used for electronic design and test functions in research and development labs around the globe. The Company has roots in the original electronics measurement business of Hewlett-Packard that dates back to the 1930’s, which was spun out of HP in 2000 in the form of Agilent Technologies. Agilent subsequently spun Keysight out in 2014.
Since its separation from Agilent, Keysight’s management has ramped up its focus on expanding high-value software and integrated solutions that cater to research and development labs, particularly in wireless and wired communications, aerospace and defense, semiconductor, general industrial, and next-generation automotive applications. Keysight often has a dozen or more engineers working onsite with its largest customers in these segments in order to develop the tools necessary for prototyping, design verification, and field testing of new products. Keysight customers are a “who’s who” list of innovators, including: Apple, Amazon, Google, Microsoft, Mediatek, Facebook, NVIDIA, Qualcomm, Taiwan Semi, Tesla, U.S. Naval Research Lab, and NASA (to name more than a few), yet Keysight has over 30,000 clients, with very little in the way of customer concentration.
The product development at these leading customers is usually spread across several phases, with each phase requiring a different set of test-and-measurement tools, such as oscilloscopes, signal analyzers, logic analyzers, and digitizers. Meanwhile, the customer will make numerous revisions to the product or service in development, requiring repetitional use of the test tools. In order to maintain continuity of customer settings and data for the various test-and-measurement tools during this rapidly shifting development workflow, Keysight offers a software platform called Pathwave. Pathwave automatically replicates many steps that have to be done manually for competing solutions, and helps innovators get their products to market much faster. In turn, Keysight gains valuable knowledge about where industry standards are moving, years in advance, and uses internal R&D spending to quickly expand its cutting-edge solution portfolio to its broader customer base.
We estimate around 60% of revenues are derived from recurring software and hardware sales into R&D labs and expect such revenues to continue growing faster than the rest of the Company. Importantly, these solutions tend to have higher margins than Keysight’s average corporate profitability, as there is less competition and more value-add, relative to the Company’s legacy manufacturing test-and-measurement business.
Keysight should be able to grow organic revenues at close to double-digit rates over the next several years as it increasingly enables customers in rapidly growing end markets. For example, Keysight’s largest business segment is focused on serving R&D labs in the wireless and wired communication ecosystems. We expect the Company to benefit from a continued ramp-up in customer investments to develop and rollout the various flavors of 5G air interface technologies over the next several years. In addition, nearly all major automotive manufacturers are increasing the content of electronic systems onboard vehicles – from advanced driver-assistance systems (ADAS) to infotainment – which is a vast new market that Keysight has been recently tapping into. Also, the Company has long served government, aerospace and defense customers, with nearly $1 billion in sales in this sector – particularly focused on communications. The recent passage of the National Defense Authorization Act in the U.S. should enable faster growth than in years past.
We started purchasing Keysight Technologies in early January – before the COVID-19 outbreak began in China and added to positions during COVID-19 related weakness. The stock currently trades at very attractive historical and absolute multiples, and we think the Company has the ability to grow earnings at double digits for several years. As such, Keysight will be competing with existing names in the portfolio for capital as we progress through the year.”
In Q4 2019, the number of bullish hedge fund positions on KEYS stock decreased by about 2% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.
