Kimberly Clark: Barron's Looks Right on this One

Kimberly Clark (NYSE:KMB) was written up in this week's Barrons as a good buy. I agree. Here's why...

April 18, 2008 close: $63.34

52-week range: $62.16 (Jan. 22, 2008) - $72.79 (Jun. 5, 2007)

Yield = 3.66%

KMB makes and markets personal care, consumer tissue products and away-from-home products. Major brands include Huggies and Pull-Ups, Kotex, Depends and Poise, Kleenex, Scott, Cottonelle, and Viva.

Kimberly Clark is one of a handful of stocks that garner Vlaue Line's A++ financial strength rating. They also earned top 1 percentile rankings in both 'stock price stability' and 'earnings predictability' categories. Not surprisingly they also get Value Line's #1 [top] rank for safety.

KMB has shown remarkable earnings growth consistency over the years with higher EPS in 14 of the past 16 years. The three instances when EPS declined were minimal- a 1.4% dip from 1992 to 1993, a 2% decline from 1997 to 1998 and a 1.2% contraction between 2000 and 2001 [during the last official U.S. recession.]

Kimberly-Clark Corp: Key Ratios*

* Sources: MSN MoneyCentral & Value Line

High quality stocks with good yields typically trade at premium prices. KMB is no exception. Their 10-year median P/E has been 17.0 and the average P/E over the past five years has been 17.66x.

Kimberly Clark shares finished last week at just 13.9 times consensus views for 2008 of $4.55/share. This is the lowest P/E for KMB since early 2003 when the shares dropped along with the general market. Buyers of KMB back then saw their shares climb 60.8% going from $42.90 to $69.00 in about 19 months.

KMB buyers at the low in 2006 paid 14.5x forward estimates and watched the shares move up 28.6% going from $56.60 to $72.80 over just 16 months. Those are great moves on a stock with a Beta of 0.7 and a hefty yield. The gains just quoted did not include dividends.

What would be a reasonable 12-month target price? If KMB shares return to their normalized 17 multiple we would see $77.35. This is confirmed by looking at KMB's historical price/sales ratio. Even a lower than normal 1.7x estimated revenues of $45.85/share leads me to a $77.94 goal price. Today's yield of 3.66% is the highest in many years and better than virtually all bank CDs, money markets and even U.S. Treasuries.

From last week's quote of $63.34 to $77 would be a gain of $13.66 or + 21.57% plus the 3.66% current yield for a total return potential of > 25%.

Disclosure: Author owns KMB shares