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Kimberly-Clark Corporation KMB April 12, 2007. Investment Managers. Jessica Boghosian jboghos2@uiuc.edu Stephen Proffer proffer2@uiuc.edu Matthew Storkman storkman@uiuc.edu Gleb Zarkh gzarkh2@uiuc.edu. Company Overview. Global health and hygiene company headquartered in Dallas, Texas
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Investment Managers • Jessica Boghosian jboghos2@uiuc.edu • Stephen Proffer proffer2@uiuc.edu • Matthew Storkman storkman@uiuc.edu • Gleb Zarkh gzarkh2@uiuc.edu
Company Overview • Global health and hygiene company headquartered in Dallas, Texas • Manufacturing facilities in 37 countries with brands sold in more than 150 countries • Four segments: • Personal Care • Consumer Tissue • K-C Professional & Other • Health Care • Revenue of $16.75 Billion and Market Cap of $31.57 Billion
Kimberly-Clark Management • Long-term success factors: • Developing new and improved products • Responding effectively to competitive challenges • Obtaining and maintaining leading market shares • Controlling costs • Managing currency and commodity risks
Corporate risks • Manufacturing • Cellulose fiber is the primary raw material for tissue products and is an important component in disposable diapers, training pants, feminine products, incontinence and health care products, and away-from-home wipers. • Cellulose fiber (recycled fiber from recovered waste paper) is subject to significant price fluctuations due to the cyclical nature of these fiber markets. Recycled fiber accounts for approximately 29 percent of the Corporation and its equity companies' overall fiber requirements.
Corporate Risks • Manufacturing • A number of K-C’s products, such as diapers, training and youth pants, and incontinence care products contain certain materials which are principally derived from petroleum. These materials are subject to price fluctuations based on changes in petroleum prices, availability and other factors. Derivative instruments have not been used to manage these risks
Corporate risks • The Corporation's manufacturing operations utilize electricity, natural gas and petroleum-based fuels. • Derivative instruments are used to hedge a substantial portion of natural gas price risk. • Highly competitive marketplace for sales • Increased concentration and a growing presence of large-format retailers and discounters = low bargaining power for K-C. • Retail trade agreements • Higher trade discounts or allowances could lead to reduced profitability.
Expense management • Marketing, sales, and administrative costs have increased over the last 3 years despite their “Competitive Improvement Initiatives” program implemented in 2005.
Expense Management-Outsourcing • As part of the Corporation’s Global Business Plan, a number of administrative functions are being transferred to third-party service providers beginning in 2007. Those functions include: • Information technology • Finance and accounting • Sourcing and supply management • Human resources services
Revenue Sources • K-C is involved in a new global marketing strategy to extend brand-building capabilities outside the United States. • This strategy will help recent problems in expanding globally and in developing and emerging markets such as Asia, Latin America, the Middle East, Eastern Europe and Africa.
RCMP position • Purchased 300 shares on April 20, 2005 at $63.91/share • Total investment of $19,173 • Currently trading at $69.65/share as of April 11, 2007 • Current value = $21,033 • Unrealized gain of $1,860 (9.7%)
Competitors • Who • Colgate-Palmolive (CL) • Unilever (UN) • Procter & Gamble (PG) • Playtex (PYX) • Why • Industry specific • Market capitalization
Comparables • K-C trades at a discount to its competitors with the exception of Unilever NV. • Dividend yield is high and the profit margin is mid-range compared to its competitors
DCF Analysis • Estimates • Stable sales growth • Continuing efforts to expand internationally • Population rates are main sales driver • Costs have been increasing faster than revenues • Management believes strategic cost reduction plan will begin to have effect in 2009 • Forecast shows plan benefiting firm beginning 2010
DCF Analysis • DCF value per share $68.46 • Market price of $69.65 (as of April 11, 2007) • WACC • Sustainable growth rate = 3.5% • Beta = 0.7 • Number of shares outstanding = 455.5 Million
DuPont Analysis • ROE = PM X TAT X EM • 24.6% = 8.96% X .98 X 2.8 • Where: • PM = net profit margin • TAT = total asset turnover • EM = total assets/shareholders’ equity
Recommendation • HOLD the currently owned 300 shares of KMB. • Low correlation with the market • Minimally correlated to other stocks in portfolio • Consistent and stable growth • Dependable dividend yield