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Dallas-based Kimberly-Clark (NYSE:KMB) is one of the world's leading manufacturers of personal care and hygiene products. Kimberly-Clark operates under four major business segments:
1. Personal Care Segment - is their biggest contributing over 40% of total revenues. Major brands include Huggies, Pull-Ups, Kotex, Depend and Poise to name just a few.
2. Consumer Tissue Segment - contributes over 30% of total revenues, it includes major brands such as Kleenex, Scott, Cottonelle, Viva, etc.
3. Kimberly-Clark Professional Segment - consists of facial and bathroom tissue, paper towels and napkins and a range of safety products and contributes over 15% of total revenues.
4. Healthcare Segment - consists of disposable healthcare products such as surgical drapes and gowns, face masks, exam gloves and respiratory products, etc. - this is their smallest segment which contributes under 10% of total revenues.
Recent weakness in the stock market has created a rare opportunity to buy this blue-chip stalwart on sale. Since calendar year 1991 there have only been a handful of times when investors would have had the opportunity to buy Kimberly-Clark at such a low valuation.
Therefore, we feel this is an excellent time for conservative income-oriented investors to consider building a position in this high-quality company.
Figure 1 below looks at Kimberly-Clark through the eyes of our EDMP, Inc. F.A.S.T. Graphs since 1991 (*note that data is only reported for every other year due to space constrants).
The orange line with white triangles calculates our Graham-Dodd modified formula for True Worth valuation for Kimberly-Clark. The green shaded area expresses the earnings build that Kimberly-Clark has achieved over this almost 20-year timeframe.
The blue line with asterisks calculates the normal PE ratio that the stock market has applied to Kimberly-Clark since 1991. The turquoise shaded area represents the dividends paid out of the green shaded area, or earnings, since 1991. And of course, the black jagged line represents monthly closing stock prices since 1991. (Click charts to enlarge)
Figure 1 KMB 20yr EPS Growth Correlated to PriceFigure 1 KMB 20yr EPS Growth Correlated to Price
Figure 2 below depicts Kimberly-Clark’s historical price to sales ratio. Once again, it is vividly clear that based on fundamentals, Kimberly-Clark has rarely been available at such an attractive entry point. Buying low with the ultimate goal of selling higher is one of the most basic of investor objectives, and since sales are beginning to improve for Kimberly-Clark, today's low price to sales may represent one of the best opportunities in several decades to accomplish this basic investor goal.
Figure 2 KMB 20yr. Historical Price to Sales RatioFigure 2 KMB 20yr. Historical Price to Sales Ratio
Figure 3 below calculates performance associated with Figure 1. Kimberly-Clark is a dividend aristocrat with a legacy of returning cash to shareholders in the form of a regular dividend. As business was modestly weakened during the recession, Kimberly-Clark displayed this commitment of returning cash to shareholders by utilizing cash reserves towards paying and increasing their dividend.
In February of 2010, Kimberly-Clark raised their dividend by approximately 10% allowing them to maintain a top-tier payout. During calendar year 2009, the company generated just under $3.5 billion of cash from operations. Kimberly-Clark deployed $986 million of this towards dividend payments, approximately $850 million towards capital expenditures, just under $600 million towards debt repayments and almost $460 million was allocated for acquisitions.
Figure 3 KMB 20yr. Dividend and Price Performance HistoryFigure 3 KMB 20yr. Dividend and Price Performance History
Thesis for Growth
With revenues just over $19 billion in 2009, Kimberly-Clark's management team is committed to sustainable future growth. We believe their global business model and commitment to innovation, coupled with their strong portfolio of brands positions Kimberly-Clark for profitable future growth. As economic conditions slowly improve, Kimberly-Clark is expected to ramp up their marketing and branding efforts. Additionally, the company plans to allocate more than $500 million towards stock repurchases in 2010.
Delivering sustainable cost reductions through their FORCE program (Focused On Reducing Costs Everywhere) has generated more than $750 million worth of savings over the last five years alone. Management objectives are to generate an additional savings of $400 million - $500 million over the period 2011 to 2013.
Therefore, we believe that management’s continued focus on portfolio management with a strong emphasis for innovation and cost reduction should enable them to improve their working capital efficiency going forward. In the first quarter of 2010 Kimberly-Clark's adjusted gross margin was up over 210 basis points compared to a year ago, and represented the sixth consecutive quarter of year-over-year improvement.
Figure 4 below calculates the consensus 5-year forecast earnings growth for Kimberly-Clark (KMB) by 15 leading analysts reporting to either FirstCall and/or Zacks. Margin improvement, cost savings and a continued commitment to innovation has led analysts to forecast a strong improvement in earnings growth for Kimberly-Clark. The consensus earnings growth estimate by these 15 analysts expects profit growth in excess of 8% over the next 5 years. This is approximately a 25% improvement over Kimberly-Clark's historical growth of just over 6% annually.
Figure 4 KMB 5yr. Consensus Earnings Forecast Figure 4 KMB 5yr. Consensus Earnings Forecast
Conclusion
Based on historical levels of how the market has traditionally capitalized Kimberly-Clark, current market values appear to be an anomaly. At today's historically low valuation and improved prospects for future growth, Kimberly-Clark (KMB) may be a compelling investment for conservative long-term investors seeking moderate growth, and an above-average growing dividend income stream.
Disclosure: Long: KMB at the time of writing.
The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Source: Kimberly-Clark: Low Valuation, High Yield