Kimberly-Clark (KMB)

1
Kimberly-Clark (KMB)

• Presented by Alex Ring
• March 2, 2006

2
RCMP Position

• Purchased 300 shares on April 20, 2005 for 63.91
  per share
• Now we have 302.255 shares
• Represents 6.3 of portfolio based on market
  values
• Loss on position -6.74 or - 1,293.00
• Not great performance, but havent held even held
  it a year.

3
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 1928.
• 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 2000. Recent ones have been in their
  health care products business.

Source Kimberly-Clark 2004 Annual Report
4
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 its 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
5
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

6
Vulnerabilities Related to Raw Materials

• Company Spun-off Neenah Paper (NP) on November
  30, 2004. 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.

7
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 firms
  profits could be squeezed as a result.

8
Kimberly-Clark The Business

• Where Does the Company Make Its Money?
• Business Segment Information
• Consumer Tissue
• Personal Care
• Business to Business

9
Where the Company Makes its Money
2004 Operating Profit 2004 Operating Profit
By Segment (in millions) By Segment (in millions)
Personal Care 1,253.20
Consumer Tissue 803.10
Business to Business 656.60
Other Income -51.20
Unallocated-net -155.30
2,506.40
2004 Operating Profit 2004 Operating Profit
By Region (in millions) By Region (in millions)
United States 1,953.10
Canada 122.00
Europe 221.00
Asia, Latin America and Other 416.80
Other Income -51.20
Unallocated-net -155.30
2,506.40
Source Kimberly-Clark 2004 Annual Report
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Consumer Tissue

• Segment Operating Profit Margin 15.0
• Paper towels, bathroom tissue, and facial tissue.
  Products familiar to most consumers.

11
Personal Care

• Segment Operating Profit Margin 21.0
• Products include diapers, baby wipes, youth
  training pants, incontinence products, and
  feminine care products.

12
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.

13
Kimberly-Clark The Stock

• Market Price as of 02/28/06 - 59.60
• Dividend Yield 3.30
• P/E (ttm) 18.02 (SP 500 18)
• Forward P/E 14.06
• Debt/Equity - .687
• Current Ratio 1.03
• Beta - .56 (3yr with SP 500)

Source Yahoo Finance October 26, 2005
14
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.

15
1 yr chart (competitors)
16
1 yr chart (50 200 day MA)
17
5 yr chart (50 200 day MA)
18
5 yr chart (SP 500)
19
Kimberly-Clark The Stock
DIRECT COMPETITOR COMPARISON  


KMB Pvt1 PYX PG Industry
Market Cap 27.95B N/A 653.49M 201.79B 1.09B
Employees 60,000 55,0001 N/A 110,000 9.60K
Qtrly Rev Growth (yoy) 2.80 N/A -9.90 26.90 7.40
Revenue (ttm) 15.90B 19.66B1 595.25M 61.68B 1.78B
Gross Margin (ttm) 31.91 N/A 50.46 51.05 16.88
EBITDA (ttm) 3.28B N/A 91.90M 14.42B 277.52M
Oper Margins (ttm) 14.53 N/A 10.97 19.95 4.42
Net Income (ttm) 1.58B 623.00M1 12.53M 7.77B 2.75M
EPS (ttm) 3.285 N/A 0.200 2.733 0.23
P/E (ttm) 18.21 N/A 51.50 22.45 23.05
PEG (5 yr expected) 1.96 N/A 1.75 2.02 2.83
P/S (ttm) 1.75 N/A 1.11 3.28 0.61
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Correlation Matrix
  AEOS CPRT FR JKHY JPM KMB MS MVSN SRCL WAG
AEOS 1.00
CPRT 0.21 1.00
FR 0.21 0.43 1.00
JKHY 0.24 0.30 0.17 1.00
JPM 0.32 0.38 0.40 0.38 1.00
KMB 0.08 0.39 0.25 0.24 0.35 1.00
MS 0.27 0.27 0.30 0.41 0.67 0.30 1.00
MVSN 0.26 0.15 0.16 0.26 0.31 0.14 0.32 1.00
SRCL 0.11 0.02 0.06 0.13 0.22 0.13 0.17 0.06 1.00
WAG 0.26 0.28 0.21 0.26 0.34 0.26 0.34 0.12 0.31 1.00
Correlation based on 3 years of weekly returns (156 data points) Correlation based on 3 years of weekly returns (156 data points) Correlation based on 3 years of weekly returns (156 data points) Correlation based on 3 years of weekly returns (156 data points) Correlation based on 3 years of weekly returns (156 data points) Correlation based on 3 years of weekly returns (156 data points) Correlation based on 3 years of weekly returns (156 data points) Correlation based on 3 years of weekly returns (156 data points) Correlation based on 3 years of weekly returns (156 data points) Correlation based on 3 years of weekly returns (156 data points) Correlation based on 3 years of weekly returns (156 data points)
21
DCF Analysis
22
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

23
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

24
Sensitivity Analysis
Sustainable Growth Rate (g) Sustainable Growth Rate (g) Sustainable Growth Rate (g) Sustainable Growth Rate (g) Sustainable Growth Rate (g) Sustainable Growth Rate (g) Sustainable Growth Rate (g)
  0.02 0.025 0.03 0.04 0.045 0.05 0.055
WACC 0.06 70 79 90 131 171 252 495
WACC 0.07 56 61 67 86 102 125 164
WACC 0.078 48 51 56 68 77 89 106
WACC 0.08 46 49 53 64 72 83 97
WACC 0.09 39 41 44 51 56 62 69
WACC 0.1 34 36 37 42 45 49 53
25
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)

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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