An IBM office in Foster City, Calif.
David Paul Morris/Bloomberg
On Monday, IBM will hold a meeting with analysts, presumably to discuss the financial details of its coming spinoff of Kyndryl, the company’s 90,000-employee IT infrastructure business. You might want to be long the stock headed into the event.
Earlier this week, IBM (ticker: IBM) made an important filing with the SEC about the spinoff. It gave investors a first look at some of the financial details of the transaction, which it expects to close before year end. IBM expects to distribute at least 80.1% of the new company’s shares to current shareholders in a tax-free stock dividend. It will sell the remaining shares over the next 12 months, likely using the proceeds to reduce debt.
The filing shows that Kyndryl, on a pro forma basis, had 2020 revenue of $19.4 billion, down from $20.3 billion in 2019 and $21.8 billion in 2018. For the 2021 first half, revenue on a pro forma basis was $9.4 billion. Adjusted for costs related to the spinoff and recent workforce reductions, Kyndryl had pretax profits of $378 million in 2020 and $156 million in the first half of 2021. The filing also indicates that on a pro forma basis, IBM’s adjusted 2020 revenue would be $55 billion from continuing operations, down from the originally reported $73.6 billion.
Despite the recent pattern of modest year-over-year revenue declines, IBM makes it clear in the filing that it sees growth potential for Kyndryl, noting that the company addresses a market for IT services growing at about 7% a year that it estimates will reach $510 billion by 2024.
Evercore ISI hardware analyst Amit Daryanani on Thursday added IBM to his firm’s “tactical outperform” list, suggesting Monday’s event could be a positive catalyst for the stock. He writes that investors will be “positively biased” to the upside potential in post-spinoff IBM, anticipating the company will project mid-single-digit top-line growth and high-teen pretax margins. And he sees signs of stabilization in the Kyndryl business, noting that the recent filing shows revenue was up 0.3% in the June quarter, reversing the recent pattern of revenue declines.
IBM has reported shrinking revenue in eight of the past nine years. Its last growth year was a scant 0.6% in 2018. The last significant growth came in 2011, when the business grew 7.1%.
Daryanani notes that IBM in the filing cited Atos, DXC, Fujitsu, Infosys , Rackspace , Tata Consultancy Services , and Wipro as competitors for Kyndryl. He points out that the peer group trades in the range of six to seven times Ebitda, or earnings before interest, taxes, depreciation, and amortization. That suggests a valuation for Kyndryl in the $14.5 billion to $17 billion range, or about 11% to 14% of IBM’s current valuation.
Daryanani keeps his In Line rating and $150 target price on IBM shares, but adds that the stock could be worth $160 or more on a sum-of-the-parts basis.
IBM stock is up 0.3%, at $139.56, in recent trading. The stock has rallied more than 5% over the past seven trading days. Kyndryl will trade on the New York Stock Exchange under the ticker KD.
Write to Eric J. Savitz at [email protected]
