Keysight has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 23.8% to $167.33 per share while the index has gained 27.3%.

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Why Is Keysight Not Exciting?

We're sitting this one out for now. Here are three reasons why KEYS doesn't excite us and a stock we'd rather own.

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 $2.34 billion in the latest quarter, and it averaged 1.8% 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 Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for Keysight, its EPS declined by more than its revenue over the last two years, dropping 9.8%. This tells us the company struggled to adjust to shrinking demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Keysight’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Keysight isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 22.3× forward P/E (or $167.33 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.

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