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Solved: Calculating adjusted cost basis after Kyndryl spin-off

This represented 4.8% of the market cap of IBM at the time of the spinoff, for a business with 20% of the combined revenues. IBM retained 19.9% of Kyndryl stock in the transaction but intends to dispose of that stock over the next year. Kyndryl joined the S&P Midcap 400 on November 5 th and there are about 224 million shares outstanding. It has about 90,000 employees, many of them highly skilled. It prov ides 2 million terabytes of storage and manages 750,000 virtual servers and 270,000 network devices.

  • I also believe it’s due to management being better incented with compensation including stock and options directly tied to the business.
  • The Motley Fool has no position in any of the stocks mentioned.
  • Kyndryl’s revenues are annuity-like in that they are highly recurring and mostly on long term contracts.
  • IBM plans to exchange its stake in Kyndryl for IBM debt over the following 12-month period.
  • Last November, IBM (IBM -1.97%) completed its spin-off of Kyndryl (KD -2.32%), the managed infrastructure services segment of its Global Technology Services segment.

IBM has long been a big dividend investors stock and Kyndryl currently does not pay one. Kyndryl’s market cap is 4% of IBM’s, making it too small for large cap funds and investors. Kyndryl also has the stigma of being the junk IBM needed to jettison to grow again. All this and tax loss selling should be over soon, removing major headwinds for the stock. The plan has always been for IBM to distribute shares of Kyndryl to its shareholders in a tax-free transaction.

However, IBM might also eventually cut its dividend, which currently boasts a high forward yield of 4.9%, to free up more cash for that expansion. If that happens, IBM will lose its status as a Dividend Aristocrat of the S&P 500. But are investors overestimating IBM’s turnaround potential while ignoring Kyndryl’s ability to expand without being tethered to Big Blue? Let’s take a fresh look at both companies to decide.

Key Data

Kyndryl upon its spinoff issued $3.2 billion of bonds. Moodys assigned an investment grade rating of Baa2. This will allow flexibility for growth the white coat investor through acquisitions, dividends, and business investment. Growth areas – The IT business is rapidly evolving leading to new opportunities.

By comparison, Kyndryl’s larger IT services competitor Accenture (ACN -0.83%) grew its revenue 5% in fiscal 2019, 3% in 2020, and 14% to $50.5 billion in 2021. That jarring comparison suggests that Kyndryl’s declines weren’t entirely caused by macro headwinds. IBM’s focus on cutting Kyndryl’s costs likely dulled its competitive edge, as well as its ability to keep pace with nimbler rivals like Accenture. Nearly 80.1 per cent of Kyndryl shares were distributed to the shareholders of IBM, who received one Kyndryl share for every five IBM shares owned. “We are thrilled that Kyndryl is today an independent company … with 90,000 of the best and brightest professionals, a strong balance sheet and a path to growth”, said Martin Schroeter, Kyndryl’s chairman and chief executive.

On an unadjusted basis, Kyndryl produced a pre-tax loss of $1.8 billion and a free cash flow loss of $0.3 billion in 2020. Kyndryl estimates that its current addressable market is $415 billion. That market is expected to grow by 7% annually, reaching $510 billion in 2024.

Why Kyndryl Holdings Stock Crushed the Market Today

The company was incorporated in 2020 and is headquartered in New York, New York. Comparing Kyndryl to its peers, it is superior to Unisys with its poor balance sheet and more similar to the other two. It also has significantly superior prospects now that it can go after significant new business it couldn’t offer before. It also has a good balance sheet, and the majority of the largest companies as existing customers to cross sell to.

Despite generating $19.35 million in revenues during the year ended December 30, 2020, the company still reported a net loss of $2.01 billion for the same year. The company is expected to expand IBM’s foray into the cloud computing market. Still, it faces the daunting task of proving that it has not inherited the legacy problems that continue to plague IBM, its parent company. Hybrid what is forex4you cloud computing and artificial intelligence will be at the center of everything IBM does. IBM is betting that its large enterprise clients will opt for an infrastructure that mixes on-premises hardware and public cloud platforms, instead of simply going all-in on one of the major cloud platforms. Details have been scarce on the spinoff since it was announced in late 2020.

Many investors are wondering what to do with this new Kyndryl stock. Is it a better buy than the parent company, IBM?

This is partially offset by its current weak profit margin versus peers. However, profits are better than they look as they are understated by depreciation significantly exceeding capital expenses. I believe it should be trading at a similar price to sales as its peers, or at least double its current price. However, it will take time, probably 2-3 years, for Kyndryl to get its profit margin up and its revenue bleed down. Since Kyndryl was just spunoff, there is a lot of noise in the numbers.

It’s Time to Take Profits in IBM Stock, Morgan Stanley Says

The business is worldwide with 46% coming from the Americas and another 46% from Europe and the Middle East. Customers represent 75 of the Fortune 100 companies. However, he expects the company to start showing revenue growth in 2025, by which time he is confident potential customers will have stopped seeing it as an IBM subsidiary. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.

IBM Shed Half Its Stake in Kyndryl and Plans to Sell the Rest Soon

Most of IBM’s investors likely looked at those numbers, remembered why Big Blue was so eager to divest the struggling business, and immediately sold their new shares of Kyndryl. Kyndryl’s stock opened at $31.50 on Nov. 3, but it now trades at about $17 per share. During that same period, IBM’s stock advanced about 4%.

And again, they said they’ll hold it as long as a year, but it’s really up to them. It’s not going to change– it’s not going to change what we do. And it’s certainly not going to change the ecosystem we participate in.

That situation is likely to stick around for the long haul. Kyndryl’s pre-spinoff operations generated just $0.6 billion of free cash flows in 2020, out of $15.0 billion for IBM as a whole. The combined operation’s cash machine is staying under the Big Blue banner, leaving little room for shareholder-friendly dividend policies at Kyndryl.

After removing amortization, which is almost entirely for deferred costs, adjusted EBITDA was $1.09 billion. Kyndryl defines deferred costs as costs for software, contract setup and other contract costs. While it’s OK for accounting purposes to capitalize and amortize these costs, they should not be added back to adjusted EBITDA. That is because the amortization is offset by cash paid for the initial costs that were capitalized. Also, Kyndryl has way more deferred costs than most other companies. I find including amortized deferred costs in adjusted EBITDA very misleading.

On Tuesday, Kyndryl filed its Form 10 registration statement with the SEC that filled in some of the blanks. Kyndryl is led by Martin Schroeter, who previously spent more than a decade at IBM. Some investors might find Schroeter’s experience reassuring, city index: a reliable broker but Kyndryl might need to hire an outsider with fresh ideas to turn around its massive business. Kyndryl also doesn’t pay a dividend yet, since its operations only generated a low single-digit percentage of IBM’s FCF in previous years.

More than half of IBM’s revenue currently comes from services. When the spinoff is done, the majority of IBM’s revenue will be tied to cloud software and solutions. And every one of our customers is on a journey of some, you know, a cloud journey, a data journey, a security journey.

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