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Kimberly-Clark Corp. (NYSE:KMB) operates a business that supplies products that will be in demand worldwide until the common cold is cured. That seems like an extremely strong business, but Intelligent Investors must go beyond simply deciding that a brand is good, or a business model is good, and look closely at the fundamentals of the company to determine its risk level then calculate an intrinsic value. By using a ModernGraham analysis, one can maintain a systematic analysis across companies and even industries to easily compare one potential investment's risk level and opportunity for value against another potential investment. What follows is a specific look at how Kimberly-Clark Corporation fares in the ModernGraham valuation model.


Defensive and Enterprising Investor Tests:

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

MG Value$63.63
MG OpinionOvervalued
Value Based on 3% Growth$68.60
Value Based on 0% Growth$40.22
Market Implied Growth Rate7.23%
Net Current Asset Value (NCAV)-$20.42
PEmg22.96
Current Ratio1.19
PB Ratio8.90

Balance Sheet - 9/30/2013

Current Assets$6,894,000,000
Current Liabilities$5,780,000,000
Total Debt$5,388,000,000
Total Assets$19,364,000,000
Intangible Assets$3,480,000,000
Total Liabilities$14,697,000,000
Outstanding Shares382,100,000

Earnings Per Share

2013$5.58
2012$4.42
2011$3.99
2010$4.45
2009$4.52
2008$4.06
2007$4.09
2006$3.25
2005$3.31
2004$3.55
2003$3.33

Earnings Per Share - ModernGraham

2013$4.73
2012$4.30
2011$4.23
2010$4.26
2009$4.06
2008$3.77

Conclusion:

Kimberly-Clark Corp. has exhibited solid growth over the historical period, but it does not qualify for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is not interested because the company's current ratio is too low and the stock is trading at high PEmg and PB ratios. The Enterprising Investor is turned away because the company's debt levels are too high relative to its current assets. The company as a whole, while a very good company that is likely to be around for a long time in the future, presents slightly more risk than value investors following Benjamin Graham's methods are willing to accept. As a result, those investors should investigate other potential investments such as through a review of companies that pass the ModernGraham requirements.

From strictly a valuation perspective, the company appears to be overvalued at the current time. The company's EPSmg (normalized earnings) have grown from $3.77 in 2008 to $4.73 in 2013, which is solid growth throughout the period, but the ModernGraham valuation model does not support the market price.

What do you think? What value would you put on Kimberly Clark Corp.? Is there a company you like better?

Disclosure: The author did not hold a position in Kimberly Clark Corp. (KMB) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Annual Valuation Of Kimberly-Clark Corp.