On Thursday, JPMorgan (NYSE:JPM) adjusted its stance on Keysight Technologies (NYSE:KEYS), shifting the rating from Overweight to Neutral and revising the price target downward to $170 from the previous $184. The change in rating is a response to the observed incremental headwinds within the Industrial customer vertical, as reported by several companies experiencing a deterioration in demand trends. There has been no prevalent optimism regarding market stabilization, which contrasts with investor expectations of a trough in end-markets and a macroeconomic recovery potentially spurred by easing rates.
The analyst noted that while order trends in the Communications Solutions Group (CSG) are expected to remain stable, with slight improvements in wireline being offset by wireless, and Aerospace & Defense orders continue to be robust, these positives are overshadowed by the challenges in the Industrial market. This dynamic is anticipated to constrain the pace of recovery despite a substantial backlog. Furthermore, the Electronic Industrial Solutions Group (ESI) is predicted to contribute to earnings headwinds sequentially, with a shift from earnings per share (EPS) accretion in the first fiscal quarter to EPS headwinds from the second to fourth fiscal quarters due to seasonality in revenues.
The anticipated modest pace of revenue recovery and earnings challenges have led to a forecast of an 8% shortfall to the FY24 consensus EPS. JPMorgan has also adjusted its EPS expectations to further below consensus. With the low likelihood of a sharp macroeconomic rebound, Keysight is projected to achieve only the lower end of its long-term 5%-7% revenue growth model for FY25. This projection has prompted JPMorgan to anticipate revisions to out-year expectations as well.
The analyst concluded that the combination of lowered estimates and the absence of near-term catalysts suggest a more limited upside for Keysight's shares from their current prices. This assessment has resulted in the decision to downgrade the stock to Neutral from Overweight and to lower the December 2024 price target to $170, down from the prior target of $184.
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