Finding a new investment for my portfolio isn’t easy. After all, I only hold about 10 companies at a time. That’s because I’m trying to concentrate my money on the best investments I can find while still making sure I’m diversified across industries. Thankfully, the FTSE 100 has a large choice of great companies.
Can Kainos make the cut?
I’ve tracked Kainos Group (LSE:KNOS) for a while now. It’s one of Britain’s most successful technology firms. Primarily, it operates across three core segments:
- Digital Services: 59.9% of operating revenue.
- Workday Services: 28.2% of operating revenue.
- Workday Products: 11.9% of operating revenue.
Kainos has a strong relationship with Workday, developing complementary products and services. These are used by over 450 enterprises globally.
In many ways, Kainos is a modern professional services firm that helps its customers to become more digitally integrated. It even helps enterprises develop AI within companies to help boost efficiency.
However, the company faces significant competition from other leading professional services firms like Accenture, Deloitte, IBM, and Capgemini.
A rebound story
Recently, the firm has been experiencing heavy stagnation in its growth journey. Primarily, I think this can be attributed to a low-growth macroeconomic environment, both in the UK and the US, which are the company’s two core markets.
Here are some of the key statistics that show the recent slowdown:
- 10-year median three-year revenue growth of 25.2%, but currently 16.8%.
- 10-year median three-year earnings per share growth of 27.3%, but currently 8.1%.
- 10-year median three-year free cash flow growth of 26.8%, but currently 1.9%.
Analysts are expecting better growth to resume next year, although it’s likely to be at slightly lower levels than historically. Investors haven’t taken well to the recent slowdown. As a result, the valuation has become much more appealing, which I consider a significant opportunity.
A value opportunity
Currently, the shares are down around 43% from all-time highs. In my opinion, that makes the stock undervalued.
Even though the price-to-earnings (P/E) ratio looks high on the surface, at 30.5, it’s not too high at all compared to what the market has tolerated for the shares historically. In fact, it’s selling at roughly 25% lower than its 10-year median P/E ratio of 40.
Even though I’m confident in the bargain here, I have to also assess the risks.
Risk is the name of the game
In my opinion, business is all a game of calculated risks. One of the key concerns I have with the Kainos business model is that once most of its core clients are fully integrated with technology, it might struggle to generate the same level of revenue.
Additionally, if it’s helping its customers implement AI, it might underestimate how much those AI systems can replace the management and services that Kainos offers.
The world is going through a very interesting change, and I think many white-collar jobs will become automated, as well as the blue-collar ones.
A top contender
I’ve had Kainos on my watchlist for a while already. While it’s often been tempting to buy some of its shares, I can’t say I consider it one of the best investments in the world. Therefore, while I admire the business, I’m not investing in it at the moment.
