A key part of IBM’s turnaround story was written in early November: packaging the company’s low-margin, negative-growth information-technology services business, giving it a cool-sounding name, and getting it off the income statement.
That’s how Kyndryl 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 more than 4,000 customers.
Kyndryl has 90,000 employees and dominates the sector. The company had $19.1 billion in revenue, on a pro forma basis, in 2020, about twice as much as rival DXC Technology (DXC), according to Kyndryl’s spinoff documents. It has an even bigger edge on peers such as Atos (ATO.France), HCL Technologies (532281.India), Tata Consultancy Services (532540.India), and Cognizant (CTSH).
IBM stockholders got one share of Kyndryl for every five IBM shares held.
Kyndryl CEO Martin Schroeter recently told Barron’s that he views the company as a “$19 billion start-up,” which is reconfiguring its business for a world in which more and more IT workloads are shifting 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 development to adjust its business mix.
But Kyndryl is having trouble finding its own independent investor base. In late October, the stock traded above $40 on a “when issued” basis. Kyndryl opened for trading on Nov. 4 at $28.41, and has continued to fall from there.
At a recent price of $17.30, Kyndryl has a market cap of just $3.9 billion. With $1.2 billion in net debt, its enterprise value comes to $5.1 billion. That gives the company an enterprise value to sales multiple of less than 0.3. There are just four companies in the S&P 500 index with a multiple lower than that. DXC trades for about 0.7 times projected revenue for its March 2022 fiscal year.
But there are reasons that IBM investors—and others—are shunning the spun-off stock. For one thing, IBM has been attractive to investors in part for 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 yield isn’t interested in Kyndryl stock.
Another issue: Kyndryl doesn’t expect to show growth before 2025. The company projects 2021 revenue of $18.5 billion to $18.7 billion; at the midpoint, that’s a 2.6% decline from 2020’s level. 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. Short of a private-equity buyout—with the idea of revamping the company out of sight of the public markets—there are few near-term catalysts for Kyndryl stock.
IBM shareholders have plenty of potential upside from that company’s core business. They don’t need to hold Kyndryl stock.