an important part of IBM‘s
The turnaround story was written in early November: packaging the company’s low-margin, negative-growth information-technology services business, giving it a feel-good name, and removing it from the income statement.
Thus Kindrill Holdings (ticker: KD) was born. The new/old company is a leading player in the IT Managed Services business, running data centers and other IT operations for over 4,000 customers.
Kyndryl has 90,000 employees and dominates the sector. According to Kindrill’s spinoff documents, the company had revenue of $19.1 billion in 2020, on a pro forma basis, nearly double that of rival DXC Technology (DXC). It has a major lead over peers such as Atos (ato.france), HCL Technologies (532281.india), Tata Consultancy Services (532540.india), and Cognizant (CTSH).
IBM shareholders received one share of Kindle for every five IBM shares.
Kindreel CEO Martin Schroeter recently pointed out baron’s That he sees the company as a “$19 billion start-up” reconfiguring its business for a world in which more and more IT workloads are moving to the cloud and away from data centers. He says the spinoff will let the company reposition itself for growth, using mergers and acquisitions and internal growth to adjust its business mix.
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But Kyndryl is having trouble finding its own independent investor base. In late October, the stock traded above $40 on a “when issued” basis. Kindrill opened for trading on November 4th at $28.41, and has continued to decline from there.
At a recent price of $17.30, Kindrill has a market cap of just $3.9 billion. With net debt of $1.2 billion, it has an enterprise value of $5.1 billion. This gives the company an enterprise value for sales multiplier of less than 0.3. There are only four companies in the S&P 500 index, which are many times less than that. DXC trades at approximately 0.7 times estimated revenue for its March 2022 fiscal year.
But there are reasons why IBM investors—and others—have shunned the spun-off stock. For one thing, IBM has been attractive to investors thanks to its 5.6% dividend yield, the highest of any company in the Dow Jones Industrial Average.,
and one of the highest in the S&P 500. Anyone who owns IBM for the sake of yield is not interested in Kindle stock.
Another issue: Kindle isn’t expected to show growth until 2025. The company forecasts revenue of $18.5 billion to $18.7 billion in 2021; At the midpoint, this is a 2.6% drop from 2020 levels. Kyndryl sees adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, of $2.8 billion to $2.9 billion.
For investors, there’s little incentive to own a shrinking IT services company without a dividend yield. The lack of a private-equity buy-back—along with the idea of weaning the company away from the eyes of the public markets—are some near-term catalysts for Kindrill stock.
IBM shareholders have great potential from that company’s core business. They are not required to hold Kyndryl stock.
write to Eric J. at [email protected] savitz