If you believe at some point oil prices will follow the fate of the global economy and decline, Kimberly Clark (KMB) is one of the better ways to play it.
Yes, I know you can buy airlines (Delta (DAL), AMR Corp. (AMR), Continental (CAL), etc.) but an airline may still go belly up as economy cools down: People will travel less, capital markets get tighter and investors realize that there are only two type of airlines: Southwest (LUV) and the ones that go bankrupt every recession.
It seems that KMB had a horrible quarter, and may not have a good year – it’s possible, but it still made a lot of money and the lower outlook was entirely caused by an incredible jump in one commodity – oil. KMB cut costs and raised prices, but it could not do it fast enough as oil prices are up almost 40% year to date.
However, just imagine what would happen if oil prices decline: Margins will go through the roof. Over last five years KMB cut hundreds of millions of dollars of costs. If we were to normalize KMB’s profit margins to about 11%: 1-2% below of what it achieved in its margin prime or about a 1% higher where it was in 2007 and assume it would have revenues of about $50 a share next year, you’d get EPS of $5.50.
In other words, KMB is trading at about 10x normalized earnings. This is pretty cheap for a company of this quality.