Kimberly-Clark (KMB) Presented by Alex Ring March 2, 2006
RCMP Position Purchased 300 shares on April 20, 2005 for $63.91 per share Now we have shares Represents 6.3% of portfolio based on market values Loss on position: -6.74% or - $1, Not 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 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 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, 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$1, Consumer Tissue$ Business to Business$ Other Income-$51.20 Unallocated-net-$ $2, Source: Kimberly-Clark 2004 Annual Report 2004 Operating Profit By Region (in millions) United States$1, Canada$ Europe$ Asia, Latin America and Other$ Other Income-$51.20 Unallocated-net-$ $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) – (S&P 500 – 18) Forward P/E – Debt/Equity 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 Stock DIRECT COMPETITOR COMPARISON KMBPvt1PYXPGIndustry Market Cap:27.95BN/A653.49M201.79B1.09B Employees:60,00055,000 1 N/A110, K Qtrly Rev Growth (yoy):2.80%N/A-9.90%26.90%7.40% Revenue (ttm):15.90B19.66B M61.68B1.78B Gross Margin (ttm):31.91%N/A50.46%51.05%16.88% EBITDA (ttm):3.28BN/A91.90M14.42B277.52M Oper Margins (ttm):14.53%N/A10.97%19.95%4.42% Net Income (ttm):1.58B623.00M M7.77B2.75M EPS (ttm):3.285N/A P/E (ttm):18.21N/A PEG (5 yr expected):1.96N/A P/S (ttm):1.75N/A
Correlation Matrix AEOSCPRTFRJKHYJPMKMBMSMVSNSRCLWAG AEOS1.00 CPRT FR JKHY JPM KMB MS MVSN SRCL WAG 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 projected Expectations 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) WACC 0.06$70$79$90$131$171$252$ $56$61$67$86$102$125$ $48$51$56$68$77$89$ $46$49$53$64$72$83$ $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