On Tuesday, JPMorgan (NYSE:JPM) adjusted its outlook on Keysight Technologies (NYSE:KEYS) shares, reducing the company's price target from $162.00 to $156.00, while maintaining a Neutral rating on the stock.
The firm cited approaching lows in the company's core business and modest quarterly revenue declines as factors in the revision. The expected revenue dip from the second fiscal quarter to the third is projected to be around 2%, with hopes of a rebound by the end of the fourth fiscal quarter, aligning with typical seasonal patterns.
The analyst pointed out that investor confidence might be wavering not due to these slight declines, but rather because of unexpected margin outcomes within the Electronic Industrial Solutions Group (EISG).
The segment's gross and operating margins have seen significant quarter-over-quarter drops, which deviates from Keysight's historically stable results. This unpredictability, coupled with conflicting signals regarding the fiscal year 2025 outlook, has contributed to investor unease.
While the company anticipates a delay in market recovery, it also suggests that a strong rebound in equipment demand is likely, following previous pullbacks.
Looking at the financials, JPMorgan has slightly increased its fiscal year 2024 revenue estimates for Keysight after a solid second-quarter performance, aligning its earnings forecasts with the sell-side consensus.
However, the focus now shifts to fiscal year 2025, where current consensus estimates predict a 7% revenue growth and a 19% increase in earnings per share (EPS).
These figures are seen as overly optimistic by JPMorgan, considering the potential prolonged macroeconomic effects into the latter half of 2024 or early fiscal year 2025.
JPMorgan's own projections for Keysight are more conservative, forecasting a 4% revenue growth and a 9% rise in EPS, which fall below the company's long-term targets of 5%-7% for revenue and at least 10% for EPS growth.
The firm believes that adjusting and lowering investor expectations for fiscal year 2025 is a necessary step for Keysight's shares to stabilize moving forward.
Consequently, JPMorgan has also reduced its fiscal year 2025 EPS estimate for Keysight to $6.50 from the previous $6.70, reflecting the anticipated margin pressures.
InvestingPro Insights
With the recent outlook adjustment by JPMorgan on Keysight Technologies, investors may find additional context in real-time data and analysis. According to InvestingPro, analysts have revised their earnings downwards for the upcoming period, indicating caution in the short-term financial performance of the company. This aligns with JPMorgan's conservative forecast and the expectation of margin pressures. Moreover, despite a solid performance in the second quarter, analysts anticipate a sales decline in the current year, adding to the concerns outlined by JPMorgan regarding the fiscal year 2025 outlook.
The current market capitalization of Keysight stands at $25.14 billion, with a P/E ratio of 31.3, reflecting investor valuation of the company's earnings. The revenue for the last twelve months as of Q2 2024 was reported at $5.168 billion, with a notable gross profit margin of 64.16%. These figures suggest that while the company is facing headwinds, it retains a strong profit-generating capability. Additionally, Keysight's stock generally trades with low price volatility, which might appeal to investors looking for stability in their portfolio.
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