JPMorgan is signaling a strategic pair trade for investors. The firm recommends "Long Kyndryl (KD) / Short DXC Technology (DXC)" in the infrastructure sector.
According to JPMorgan analyst Tien-tsin Huang, this trade is set to capitalize on Kyndryl Holdings Inc's (NYSE:KD) structural advantages and DXC Technology Co's (NYSE:DXC) ongoing growth challenges.
Kyndryl's Structural Advantages: JPMorgan highlights Kyndryl as a compelling long position due to its significant structural advantages. Kyndryl has shown impressive progress in profitability and revenue growth since its spin-off from International Business Machines Corp (NYSE:IBM). The company's strong client relationships and ability to up-sell new services post-spin position it well for continued margin expansion and revenue growth.
With a current price target of $30, Kyndryl is expected to leverage its scale and client base to maintain market share while increasing prices. JPMorgan's investment thesis underscores the company's potential to generate significant cash flow and drive further investor interest over the next few years.
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DXC's Struggles, Risks: Conversely, JPMorgan rates DXC as a "Short" position, with a price target of $22. DXC is facing substantial hurdles, including turnaround plans in its people-based business model amid a tightening supply market.
Additionally, recent CEO disruptions pose risks of executive departures, which could further disrupt DXC's business performance.
DXC's legacy business is rapidly declining, complicating its efforts to achieve a positive growth turnaround. The company's slower pace in adapting to market changes and lack of immediate catalysts suggest fewer opportunities for near-term improvement.
The Trade Strategy: Both Kyndryl and DXC are currently trading at approximately 7x CY25E FCF. JPMorgan assigns a 7x multiple to KD and a lower 5.5x multiple to DXC for CY26E FCF.
This differential reflects the expected outperformance of Kyndryl over DXC. Investors are advised to consider this pair trade to capitalize on Kyndryl's growth potential and mitigate risks associated with DXC's ongoing challenges.
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