Kimberly-Clark (KMB)
Presented by Alex RingMarch 2, 2006
RCMP Position
Purchased 300 shares on April 20, 2005 for $63.91 per shareNow we have 302.255 shares
Represents 6.3% of portfolio based on market values
Loss on position: -6.74% or - $1,293.00Not great performance, but haven’t held even
held it a year.
Kimberly-Clark: The Company Dallas, Texas based company involved in the production
and sale of health and hygiene products. Founded in 1872 by John A. Kimberly, Havilah
Babcock, Charles B. Clark, and Frank C. Shattuck. The company was incorporated in 1928.
Operates globally in three segments: Consumer Tissue, Personal Care, and Business-to-Business.
13% of net sales over the past 4 years have been to Wal-Mart, little room for growth here.
Dividends have been paid since 1935 The Company has made 14 strategic acquisitions since
2000. Recent ones have been in their health care products business. Source: Kimberly-Clark 2004 Annual Report
The External Environment
Kimberly-Clark operates in a highly competitive environment that keeps prices relatively low. The company responds by differentiating it products by branding. As a result, it is reducing it’s workforce by 10% and closing down 20
plants related to diaper and health care products Recently the company has focused efforts toward improving
products based on consumer demands. Examples include making feminine products more aesthetically appealing by improving packaging and developed scented products.
Company recently announced that it plans to bring products that customers want to market faster than before.
Source: Reuters, Kimberly-Clark stands by earnings expectations, Feb. 24, 2006
Competitive Environment Discussion In recent year sales have been increasing
modestly Volume increases have been strong, but have been
tempered by decreasing prices This is what has been causing COGS to increase at a faster
pace that revenues 2005 sales were up 5%; 3% from volume, 2%
currency effects 2004 sales were up 8%; 5% due to volume, 3%
from currency effects
Vulnerabilities Related to Raw Materials Company Spun-off Neenah Paper (NP) on November
30, 2004. The CEO, Thomas Falk, said that the move, “strengthened our commitment to health and hygiene.” The disadvantage is that it made the company more reliant on outside suppliers for pulp products, and thus, more exposed to market prices.
Before the spin-off 40% of pulp needed for production was supplied internally. Now only 10% is supplied internally, and they do not use derivatives to hedge the risk.
Vulnerabilities, Continued
The company is exposed to price increases in energy in the form of natural gas and petroleum products. Additionally, petroleum products are used in the manufacture of diapers and training pants.
Given the competitive nature of the industry, prices for products may not adjust adequately to reflect these price increases, and the firm’s profits could be squeezed as a result.
Kimberly-Clark: The Business Where Does the Company Make Its Money? Business Segment Information
Consumer Tissue Personal Care Business to Business
Where the Company Makes its Money
2004 Operating Profit
By Segment (in millions)
Personal Care $1,253.20
Consumer Tissue $803.10
Business to Business $656.60
Other Income -$51.20
Unallocated-net -$155.30
$2,506.40
Source: Kimberly-Clark 2004 Annual Report
2004 Operating Profit
By Region (in millions)
United States $1,953.10
Canada $122.00
Europe $221.00
Asia, Latin America and Other $416.80
Other Income -$51.20
Unallocated-net -$155.30
$2,506.40
Consumer Tissue Segment Operating Profit Margin – 15.0% Paper towels, bathroom tissue, and facial tissue.
Products familiar to most consumers.
Personal Care Segment Operating Profit Margin – 21.0% Products include diapers, baby wipes, youth training
pants, incontinence products, and feminine care products.
Business to Business
Segment Operating Profit Margin – 16.6% Products sold to healthcare institutions and other
businesses. Manufactures and sells facial tissue, paper towels, bathroom tissue, and disposable health and hygiene products, to name a few.
Kimberly-Clark: The Stock
Market Price as of 02/28/06 - $59.60 Dividend Yield – 3.30% P/E (ttm) – 18.02 (S&P 500 – 18) Forward P/E – 14.06 Debt/Equity - .687 Current Ratio – 1.03 Beta - .56 (3yr with S&P 500)
Source: Yahoo Finance October 26, 2005
Share Repurchase Program
On September 15, 2005, Kimberly-Clark announced that it would be repurchasing 50 million shares over the next several years. 45 million of which shares remain to be purchased, 9 million shares
were purchased in 2005 and added $0.14 per share to 2005 EPS. This represents 10.5% of the current number of shares
outstanding 2-3% of the outstanding shares will be repurchased annually. This is in addition to an already generous dividend policy. In 2004 repurchases add $0.07 per share to earnings, and $0.14
in 2005.
1 yr chart (competitors)
1 yr chart (50 & 200 day MA)
5 yr chart (50 & 200 day MA)
5 yr chart (S&P 500)
Kimberly-Clark: The StockDIRECT COMPETITOR COMPARISON
KMB Pvt1 PYX PG Industry
Market Cap: 27.95B N/A 653.49M 201.79B 1.09B
Employ ees: 60,000 55,0001 N/A 110,000 9.60K
Qtrly Rev Growth (yoy): 2.80% N/A -9.90% 26.90% 7.40%
Revenue (ttm): 15.90B 19.66B1 595.25M 61.68B 1.78B
Gross Margin (ttm): 31.91% N/A 50.46% 51.05% 16.88%
EBITDA (ttm): 3.28B N/A 91.90M 14.42B 277.52M
Oper Margins (ttm): 14.53% N/A 10.97% 19.95% 4.42%
Net Income (ttm): 1.58B 623.00M1 12.53M 7.77B 2.75M
EPS (ttm): 3.285 N/A 0.200 2.733 0.23
P/E (ttm): 18.21 N/A 51.50 22.45 23.05
PEG (5 yr expected): 1.96 N/A 1.75 2.02 2.83
P/S (ttm): 1.75 N/A 1.11 3.28 0.61
Correlation Matrix
AEOS CPRT FR JKHY JPM KMB MS MVSN SRCL WAG
AEOS 1.00
CPRT 0.21 1.00
FR 0.21 0.43 1.00
JKHY 0.24 0.30 0.17 1.00
JPM 0.32 0.38 0.40 0.38 1.00
KMB 0.08 0.39 0.25 0.24 0.35 1.00
MS 0.27 0.27 0.30 0.41 0.67 0.30 1.00
MVSN 0.26 0.15 0.16 0.26 0.31 0.14 0.32 1.00
SRCL 0.11 0.02 0.06 0.13 0.22 0.13 0.17 0.06 1.00
WAG 0.26 0.28 0.21 0.26 0.34 0.26 0.34 0.12 0.31 1.00
Correlation based on 3 years of weekly returns (156 data points)
DCF Analysis
Financial Analysis
Conservative estimates: Costs have been growing faster than
sales, projections show this continuing Management expects $3.85-$3.95 a share
in 2006, I have $3.59 projectedExpectations were $3.70-$3.85 in 2005, in
reality they were $3.30
Financial Projections
Discounted Cash Flow value per share $61-$75 versus a current price near $60
Assumptions: WACC – 7.80%, low risk
Adjusted Beta: 0.75 Sustainable growth rate – 4.00%
Substantial impact on DCF price
Sensitivity Analysis
Sustainable Growth Rate (g)
0.02 0.025 0.03 0.04 0.045 0.05 0.055
WACC
0.06 $70 $79 $90 $131 $171 $252 $495
0.07 $56 $61 $67 $86 $102 $125 $164
0.078 $48 $51 $56 $68 $77 $89 $106
0.08 $46 $49 $53 $64 $72 $83 $97
0.09 $39 $41 $44 $51 $56 $62 $69
0.1 $34 $36 $37 $42 $45 $49 $53
DuPont Analysis
ROE = PM * TAT * EM
28.2% = 9.86% * .98 * 2.93
Where:
PM = Profit Margin (NI/Sales)
TAT = Total Asset Turnover (Sales/TA)
EM = Equity Multiplier (TA/TE)
Recommendation
Hold on to entire position Valued in line with the market, and at a discount to
peers Holds up well to DCF analysis with conservative
estimates Generous Dividends – 3.30% yield Share repurchase program will boost EPS Stable industry that provides valuable diversification
to our portfolio