Kimberly Clark, an Opportunity?
July 15th, 2008
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.
Entry Filed under: Analysis & Research
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4 Comments Add your own
1. DaveinHackensack | July 15th, 2008 at 10:29 pm
Vitaliy,
Three times since 1999, when the current secular bull market in oil began, oil prices have dropped by 40% or more. If oil prices drop by that much within the next year or two, this will most likely be another cyclical correction, and not the end of the secular bull market in oil. See, for example, “Why Oil Prices will Likely be higher in 5 years — but not necessarily in 10 or 15″
Have you given any more thought to Jim Rogers’s thesis that secular bull markets in commodities generally coincide with secular range-bound markets in stocks?
2. Sam Marx | July 16th, 2008 at 2:11 pm
Nice Choice. I like downside protection. I recommend that you look into RCL Royal Carabbean Cruises, selling below book, has had a 50% selloff, will do well when oil prices drop and may start moving up again when Fidel Castro dies and Cuba opens up. Good free cash flow, and cruises are packed. Morningstar selection.
Sam Marx
3. Vitaliy | August 2nd, 2008 at 8:42 pm
Dave,
I just wrote an article, I did on publish it yet. But I think it will answer your question. You’ll see it out soon.
Best,
Vitaliy
4. Dividend Growth Investor | August 6th, 2008 at 2:15 pm
I think that KMB is attractively valued with its low price/earnings multiple of 15, and DPR of 51%. The company also pays an above average yield of 3.60%.Kimberly-Clark is a dividend aristocrat as well as a component in S&P 500 index. It has been increasing its dividends for the past 36 consecutive years. KMB has delivered an average total return of 6.60 % annually to its loyal shareholders. over the past 10 years
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