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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Kimberly-Clark: fairly valued with a margin of safety 2 comments
    Feb 1, 2011 3:50 PM | about stocks: KMB

    I believe KMB, at approximately $65/share is fairly valued with a margin of safety on a cash flow valuation basis.

    Kimberly-Clark is a leading player in the global health and hygiene category selling bathroom tissues, diapers, feminine products, and paper towels. Its brands include Kleenex, Scott, Huggies, Pull-Ups, and Kotex. Kimberly sells its products directly and distributes them through supermarkets, mass merchandisers, and drugstores, among other outlets. Sales generated outside of North America account for about 45% of the firm's consolidated sales base.
    (Source: Morningstar.com)

    Kimberly-Clark Announces Year-End 2010 Results, 2011 Outlook and Actions to Enhance Shareholder Value

     
    I estimated the firm's WACC at 7.06% using the Capital Asset Pricing Model and the company's recent SEC filings.  ValuePro has a baseline WACC calculator here and it calculates the firm's WACC at 6.36%.  I'll assume the slightly higher mark, 7.06%.    
     
    Recent free cash flows and noted growth rates: 
    YearFCF $Millions
    2000963
    20011154
    20021554
    20031735
    20042435
    20051602
    20061607
    20071440
    20081610
    20092633
    20101780

    Average Annual Growth: approx 11%
    CAGR: approx. 6%
    Consensus Forecast Industry 5-Year Growth: approx. 11% per year
    Consensus Forecast Company 5-Year Growth: approx. 9% per year

    Assuming the company achieves a slightly lower 5-year growth rate of 8% per year, and assuming that after the next five years, the company achieves no growth or 0% growth per year forever:

    Discounted Cash Flow Valuation

    YearFCF $ Millions
    01780
    11922
    22076
    32242
    42422
    52615
    Terminal Value40033

    The firm's future cash flows, discounted at a WACC of 7.06%, give a present value for the entire firm (Debt + Equity) of $37,598 million. If the firm's fair value of debt is estimated at $7,000 million, then the fair value of the firm's equity could be $30,598 million.

    $30,598 million / 407 million outstanding shares is approx $75 per share. A 20% margin of safety from here is approx $60 so assuming all else at KMB meets my standard for good business, I'd buy it today for the long term at $60 or less.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: KMB
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Comments (2)
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  • markVP
    , contributor
    Comments (4) | Send Message
     
    Dear Eric,

     

    I have a question for you. All the cash flows you describe in your article are paid to the shareholders of the common stock of the company, as Kimberley Clark has no preferred stock or other minority interests. Why should you abstract the outstanding debt from the total amount of free cash flow, as the interest to these debt holders are already paid from other sources? It is, in other words not the present value of the entire firm, but it is (without abstracting the debt) the present value for the equity holder. Could you comment on this.
    15 Feb 2011, 04:30 PM Reply Like
  • Eric Cota
    , contributor
    Comments (22) | Send Message
     
    Author’s reply » Hi markVP,

     

    Thanks for the comment. The Kimberly-Clark cash flows described in the instablog are Free Cash Flows, found at Morningstar.com. By Morningstar's definition, Free Cash Flow = Operating Cash Flow - Capital Expenditures. My understanding is that these cash flows are available to debt holders and equity stakeholders.

     

    KMB's Free Cash Flow for 2010 is from KMB's press release announcing 4Q and full year 2010 results. I estimated the market value of KMB's debt from its most recent 10Q filing and the recent press release announcing KMB's intent to issue $700 million worth of debt (by next month?).

     

    My cash flow valuation from there is a rough back of the envelope calculation with a few harsh (I hope) assumptions thrown in. The basic method for finding the fair value of the entire enterprise (Debt + Equity) is described well here:

     

    www.investopedia.com/u...

     

    I hope that helps - let me know if I can give you more details.

     

    Eric
    15 Feb 2011, 07:10 PM Reply Like
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