Kimberly-Clark
CorporationKMB
April 12, 2007
Investment Managers
Jessica [email protected]
Stephen [email protected]
Matthew [email protected] Gleb [email protected]
Company Overview
Global health and hygiene company headquartered in Dallas, Texas
Manufacturing facilities in 37 countries with brands sold in more than 150 countries
Four segments: Personal Care Consumer Tissue K-C Professional & Other Health Care
Revenue of $16.75 Billion and Market Cap of $31.57 Billion
K-C’s 4 Business Segments
Personal Care Disposable Diapers Training and Youth Pants Swimpants Baby Wipes Feminine & Incontinence Care Products
Consumer Tissue (Household Use)
Facial & Bathroom Tissue Paper Towels Napkins
K-C Professional & Other (Away-From-Home Marketplace)
Facial & Bathroom Tissue Paper Towels Napkins Wipers Safety Products
Health Care Surgical Gowns Drapes Infection Control Products Sterilization Wrap Disposable Face Masks and Exam Gloves Respiratory Products
Kimberly-Clark Management
Long-term success factors: Developing new and improved products Responding effectively to competitive
challenges Obtaining and maintaining leading
market shares Controlling costs Managing currency and commodity
risks
Corporate risks
Manufacturing Cellulose fiber is the primary raw material
for tissue products and is an important component in disposable diapers, training pants, feminine products, incontinence and health care products, and away-from-home wipers.
Cellulose fiber (recycled fiber from recovered waste paper) is subject to significant price fluctuations due to the cyclical nature of these fiber markets. Recycled fiber accounts for approximately 29 percent of the Corporation and its equity companies' overall fiber requirements.
Corporate Risks
Manufacturing A number of K-C’s products, such as
diapers, training and youth pants, and incontinence care products contain certain materials which are principally derived from petroleum. These materials are subject to price fluctuations based on changes in petroleum prices, availability and other factors. Derivative instruments have not been used to manage these risks
Corporate risks
The Corporation's manufacturing operations utilize electricity, natural gas and petroleum-based fuels. Derivative instruments are used to hedge a
substantial portion of natural gas price risk. Highly competitive marketplace for sales
Increased concentration and a growing presence of large-format retailers and discounters = low bargaining power for K-C.
Retail trade agreements Higher trade discounts or allowances could lead to
reduced profitability.
Expense management
Marketing, sales, and administrative costs have increased over the last 3 years despite their “Competitive Improvement Initiatives” program implemented in 2005.
Expense Management-Outsourcing
As part of the Corporation’s Global Business Plan, a number of administrative functions are being transferred to third-party service providers beginning in 2007. Those functions include: Information technology Finance and accounting Sourcing and supply management Human resources services
Revenue Sources
K-C is involved in a new global marketing strategy to extend brand-building capabilities outside the United States.
This strategy will help recent problems in expanding globally and in developing and emerging markets such as Asia, Latin America, the Middle East, Eastern Europe and Africa.
Canada3%
Other25%
United States
54%
Europe18%
Consumer Tissue35.60%
K-C Professional & Other
16.18%
Health Care7.92%
Personal Care
40.11%
Corporate & Other0.19%
RCMP position
Purchased 300 shares on April 20, 2005 at $63.91/share Total investment of $19,173
Currently trading at $69.65/share as of April 11, 2007 Current value = $21,033
Unrealized gain of $1,860 (9.7%)
Portfolio Exposure
AEE 6%
AEO 19%
CPRT 9%
FR 7%
FR 7%
JKHY 3%
JPM 14%
KMB 6%
MS 9%
MVSN 1%
SRCL 5%
SRZ 7%
WAG 7%
Correlation Matrix
KMB AEE AEO CPRT FR JKHY JPM MS MVSN SRCL SRZ WAGKMB 1.000AEE 0.269 1.000AEO -0.004 0.049 1.000CPRT 0.162 10.082 0.118 1.000FR 0.254 0.386 -0.051 0.207 1.000JKHY 0.024 -0.019 0.032 0.355 0.115 1.000JPM 0.090 0.116 0.412 0.257 0.073 0.101 1.000MS 0.025 0.060 0.369 0.495 0.172 0.216 0.489 1.000MVSN -0.019 -0.008 0.288 0.298 0.172 0.362 0.525 0.475 1.000SRCL 0.126 -0.082 0.032 0.098 0.089 0.083 -0.046 0.118 -0.050 1.000SRZ -0.058 0.187 0.221 0.209 0.074 0.318 -0.034 0.085 0.060 0.065 1.000WAG 0.216 0.015 0.052 -0.050 0.008 0.191 -0.086 0.033 -0.009 0.180 0.070 1.000MKT 0.111 0.176 0.046 0.444 0.424 0.343 0.592 0.755 0.531 0.139 0.165 0.154
Competitors
Who Colgate-Palmolive (CL) Unilever (UN) Procter & Gamble (PG) Playtex (PYX)
Why Industry specific Market capitalization
1-Year Comparables
5-Year Comparables
K-C trades at a discount to its competitors with the exception of Unilever NV.
Dividend yield is high and the profit margin is mid-range compared to its competitors
Comparables
P/E EV/EBITDA EV/REV PM DIV YLDKIMBERLY-CLARK CORP. 21.45 9.469 2.08 8.95% 3.10%Colgate-Palmolive Co. 27.11 12.753 3.07 11.06% 2.20%Procter & Gamble Co. 22.43 12.664 3.14 13.14% 2.00%Playtex Products Inc. 29.35 10.765 2.25 4.75% N/AUnilever NV 13.69 11.059 1.85 11.97% 3.60%
DCF Analysis
Estimates Stable sales growth
Continuing efforts to expand internationally Population rates are main sales driver
Costs have been increasing faster than revenues
Management believes strategic cost reduction plan will begin to have effect in 2009
Forecast shows plan benefiting firm beginning 2010
DCF Analysis
DCF value per share $68.46 Market price of $69.65 (as of April
11, 2007) WACC
Sustainable growth rate = 3.5% Beta = 0.7 Number of shares outstanding =
455.5 Million
Sensitivity Analysis
Terminal Growth Rate2.83% 3.17% 3.50% 3.83% 4.17%
5.96% $104.27 $116.21 $131.37 $151.28 $178.57W 6.46% $88.63 $97.20 $107.69 $120.85 $137.81A 6.96% $76.77 $83.18 $90.84 $100.12 $111.61C 7.46% $67.45 $72.42 $78.22 $85.08 $93.33C 7.96% $59.94 $63.89 $68.41 $73.67 $79.85
8.46% $53.76 $56.95 $60.57 $64.71 $69.508.96% $48.58 $51.21 $54.16 $57.49 $61.29
DuPont Analysis
ROE = PM X TAT X EM
24.6% = 8.96% X .98 X 2.8
Where: PM = net profit margin TAT = total asset turnover EM = total assets/shareholders’ equity
Recommendation
HOLD the currently owned 300 shares of KMB. Low correlation with the market Minimally correlated to other stocks in
portfolio Consistent and stable growth Dependable dividend yield