Kimberly Clark, an Opportunity?

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.