Up 580% over 10 years but currently down 43%! Is this FTSE 100 stock worth my cash?

Our author thinks this FTSE 100 stock offers great value in a rebound moment. However, he wants to know if it’s one of the best investments in the world.

| More on:
artificial intelligence investing algorithms

Image source: Getty Images.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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:

  1. Digital Services: 59.9% of operating revenue.
  2. Workday Services: 28.2% of operating revenue.
  3. 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:

  1. 10-year median three-year revenue growth of 25.2%, but currently 16.8%.
  2. 10-year median three-year earnings per share growth of 27.3%, but currently 8.1%.
  3. 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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Oliver Rodzianko has no position in any of the shares mentioned. The Motley Fool UK has recommended Accenture Plc, International Business Machines, Kainos Group Plc, and Workday. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

17% of my Stocks and Shares ISA is invested in these 2 UK shares

Stephen Wright looks to focus on investments in companies that have strong competitive advantages. And two UK shares stand out…

Read more »

Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA into Lloyds shares

Harvey Jones bought Lloyds shares last year and is kicking himself for failing to buy even more of them. The…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Apple is still my favourite company in the S&P 500, here’s why

Apple recently unveiled a lot of new software at a developer conference. Here's why the tech giant is still my…

Read more »

Investing Articles

5 great value UK companies I’d buy in a Stocks and Shares ISA and aim to hold for decades 

Harvey Jones is getting to work on his Stocks and Shares ISA. He thinks these five firms have solid income…

Read more »

Value Shares

Are GSK shares a bargain after falling 11%?

GSK shares have taken a hit in recent weeks due to Zantac uncertainty. Here, Edward Sheldon looks at whether they’re…

Read more »

Investing Articles

Nearing £5, could the Rolls-Royce share price hit £6?

The Rolls-Royce share price has soared in the past year. Our writer thinks there could be a strong runway ahead…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s how I’d aim to build wealth the same way as Warren Buffett

Christopher Ruane looks at some of the principles used by billionaire investor Warren Buffett and explains why he also uses…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Dividend Shares

Here’s my 2024/25 dividend forecast for National Grid shares after their recent 17% plunge

National Grid shares could still be a good choice for income, even after the recent seven-for-24 rights issue, says Edward…

Read more »