By Ryan Barnes. Edited by Douglas A. McIntyre
Kimberly-Clark (
KMB
)
Kimberly-Clark has four company-designated operating segments: Personal Care, Consumer Tissue, K-C Professional Products, and Healthcare. This is the most logical place to begin our study, as the larger a company becomes the more likely it is that management & shareholders come to think of it as drawn across certain lines, with identifiable business and products within them. Also, this is our best chance to see revenue and operating income figures broken into the slices that we want; from here we can analyze each segment with a clear picture of the relative costs and benefits
Three of the four operating segments generate solid operating margins and high single-digit sales growth. The fourth segment, Consumer Tissue, is home to the ubiquitous Kleenex brand but suffers from low margins and its returns are too closely tied to pulp & paper costs, a volatile commodity that has an effect on the overall company multiple at present.
Operating Profit is one of the best measurements we have when conducting a breakup value. Net income, at the level that would make calculations ideal, is either a)not available or b)not applicable due to changes in tax structure, one-time events, and the like. It is good for us to know of any favorable tax treatment due to scale or geographic diversification within the company; these benefits would likely not exist for an operating division existing as a stand-alone company or as part of a different company.
The good break to unlock shareholder value at Kimberly-Clark would be to spin off the Consumer Tissue division as a stand alone company, letting the brand name drive value and creating the best accountability for driving future growth from it. This would allow the Personal Care division to receive a multiple in line with competitors like Proctor & Gamble (PG), which has similar margins and returns on equity.
The smaller divisions of K-C Professional and Healthcare (both business to business units) could be sold to an International Paper or Georgia-Pacific, as
KMB
just isn’t big enough to gain sufficient operating leverage against their bigger rivals. This would leave Kimberly-Clark as a lean consumer products company with #1 or #2 market share in fairly recession-proof business like diapers and adult care products.
The sale of the B2B groups should both fetch about 2x sales, or about $8B combined. The “Kleenex Company” spin-off would likely trade at a low multiple, but have very stable cash flow and brand quality; at just 1.5x sales the stock would be worth nearly $9B to shareholders, and carry a lot of the roughly $3B in debt off the Kimberly-Clark balance sheet.
That leaves the personal products company Kimberly-Clark, which could be given freedom to trade a level closer to PG. Proctor & Gamble currently trades at a trailing P/E of just over 24 with a historical level closer to 19-20. Giving ourselves room for a modest moat, a Kimberly-Clark trading at 17x trailing earnings is very fair, and would place the market cap at just over $15B based on 2006 earnings.
There are no cash hoards to speak of, but the minority interest in Kimberly-Clark de Mexico (with 2006 revenue of over $1.5B) is worth another $2B to shareholders, placing the entire breakup value at just over $74 per share, using fully diluted share counts as of
12/31/06
. Much of the recent run-up in the stock has been based on speculation of a LBO or divestiture of some kind, so a lot of the hidden value from years past has already been unlocked.
Ryan Barnes
Ryan Barnes has over 10 years’ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others. Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.
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