Kimberly-Clark: International Growth Eclipses Low Birth Rate

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Health care product company Kimberly-Clark's (NYSE:KMB) growing international business has eclipsed its slowing business in traditional markets due to the low birth rate experienced over the last three years. And, this year does not bode favorably for the company, as the birth rate is trending on a flat trajectory for this year as well. In the company's Q2 2012 earnings call held on July 26, 2012, Kimberly-Clark noted the volume for its diaper business increased 40% in China on a quarterly basis year-over year. The company has increased its presence in China over the last few months, going from 70 cities at the end of last year to 80 cities as of the last quarter. Other emerging markets for diapers also performed very well with volume in Brazil and Russia up 20%. Growth in Europe was solid, even though the region, especially Southern Europe, is challenged with the ongoing volatility related to sovereign debt.

Emerging markets now make up about 36% of Kimberly-Clark's revenue and most of the company's growth over the last four years has been through international expansion in emerging markets.

The company reported organic sales growth of 5% in Q2. Contributing to the 5% organic growth was a higher net selling price of 2% and increased sales volume of 2%. The company's results were negatively affected 3% due to foreign currency issues.

Kimberly-Clark raised its 2012 guidance by $0.05, with an estimated earnings range of $5.05 to $5.20 per share. The company projects growth in the U.S. for 2012, but not as much as expected earlier in the year. The company is not buying back as many shares of its stock due to the increased price, which indicates the company considers its stock price to be fairly valued.

Kimberly-Clark's stock price has been on quite a tear over the last year, but has recently retreated from its peak price around $88 as shown below:

Another indicator for fair value for the company's stock price is its Price-to-Sales (P/S) ratio of 1.9,comparable to the P/S ratios for two of its competitors Procter & Gamble (NYSE:PG) and Johnson & Johnson (NYSE:JNJ), 2.2 and 2.9, respectively.

If Kimberly-Clark considers its stock price fairly valued, then Wall Street will be reluctant to push the price of the stock much higher. So, the stock price will probably be stuck in a trading range for the next several months. With the company's phenomenal international growth and future prospects for international growth, the company's stock price should be able to maintain a price above $80. Based on this, a bull-put credit spread can be considered for the position. A bull-put credit spread may be entered for a net credit by selling one put option and purchasing a second put option further out-of-the-money. The goal is for the options to expire worthless via the stock price being greater than the strike price of the short put option, leaving the initial net credit as profit.

Using PowerOptions, a variety of bull-put credit positions are available for September options expiration as shown below:

The top bull-put credit spread looks attractive with a potential return of 4.6% (39.1% annualized) and a separation between the stock price and the strike price of the short put option of 6.6%. The position can be entered for a net credit of $0.33. The specific call option to sell is the 2012 Sep 77.5 at $0.43 and the put option to purchase is the 2012 Sep 70 at $0.10.

Bull-Put Credit Spread Trade

  • Sell KMB 2012 Sep 77.5 Put at $0.43
  • Buy KMB 2012 Sep 70 Put at $0.10

A profit/loss graph for one contract of the bull-put credit spread is shown below:

For a stock price at September option expiration greater than the $77.50 strike price of the short put option, the position will realize the full 4.6% profit. For a stock price at September option expiration less than the $70 strike price of the long put option, the position will result in a total loss, however, the position should be rolled prior to realizing a loss.

A management point of $80 is set for the position. If the price of the stock drops below $80, the position should be managed via an exit or a roll.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.