JPMorgan is recommending a strategic pair trade for investors in the infrastructure sector. The firm suggests taking a “Long Kyndryl (KD) / Short DXC Technology (DXC)” position, capitalizing on Kyndryl’s structural advantages and DXC’s ongoing growth struggles.
Kyndryl’s Structural Advantages
JPMorgan sees Kyndryl as a compelling long position due to its significant structural advantages. Since its spin-off from IBM, Kyndryl has demonstrated impressive progress in profitability and revenue growth. Its 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 highlights Kyndryl’s potential to generate significant cash flow and drive further investor interest in the coming years.
DXC’s Struggles and Risks
Conversely, JPMorgan rates DXC as a “Short” position, with a price target of $22. DXC is facing substantial obstacles, including turnaround plans within its people-based business model amid a tightening supply market. Recent CEO disruptions also pose risks of executive departures, which could further disrupt DXC’s business performance. DXC’s legacy business is rapidly declining, making it difficult to achieve a positive growth turnaround. The company’s slower pace in adapting to market changes and lack of immediate catalysts suggest limited 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 anticipated 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.
