We Are Bearish On Kimberly-Clark

Kimberly-Clark Corporation (NYSE: KMB)                                        11/21/2012

Last Price: $86.28

VIEW: START SELL

Kimberly-Clark Corporation, together with its subsidiaries, engages in manufacturing and marketing health care products worldwide. The company operates in four segments: Personal Care, Consumer Tissue, K-C Professional and Other, and Health Care. The company sells its products for household use directly to supermarkets, mass merchandisers, drugstores, warehouse clubs, variety and department stores, and retail outlets; through other distributors and the Internet. Kimberly-Clark Corporation was founded in 1872 and is headquartered in Dallas, Texas.

Sector: Consumer Goods                                                                              Industry: Personal Products

Highlights:

Kimberly-Clark Corporation develops, manufactures, and distributes health and hygiene products used in both private households and professional settings. The company distributes its products in 150 countries worldwide. It operates out of 37 countries strategically selected around the globe. KMB has a market cap of $33.76 billion. The stock closed yesterday’s trading session at $86.28. In the past year, the stock has hit a 52-week low of $68.27 and 52-week high of $88.25. Technical indicators for the stock are neutral to bullish the stock is now trading above its intrinsic value and is also a slow growing company at a stretched valuation.

GROWTH AND BALANCE SHEET

Kimberly-Clark’s quarterly profit surged to $468 million, or $1.18 per share, versus $350 million, or $0.86 per share, in the year-ago period. Its adjusted earnings per share climbed to $1.24 $1.09, the sales rose 4.2% to $5.24 billion. The company is primarily a health and hygiene manufacturer, with well-known brands such as Kleenex, Huggies, Kotex, Pull-Ups, Scott, Andrex, Poise, and Depend. Kimberly-Clark achieved $22.1Billion in sales for 2011. The biggest part of their market is the USA with $10.5B. As such, we can consider KMB to be more vulnerable to a weak US economy than Colgate-Palmolive for example. The total Debt/Equity of 125.50% is high enough to consider the stock for buy at this price level.

VALUATION

Kimberly-Clark was able to recover 2008 with a great profit in 2009. But since then, the EPS is going down. KBN has a PEG ratio of 1.64 close to the industry average of 1.58. Current PE at KMB stands at 18.20, below the industry’s average of 23.75. The stock is currently trading 12% above its intrinsic value of $75 this suggests that KMB is overvalued at these levels. The beta of 0.11 implies very low volatility of the stock with respect to the S&P 500. The company has a current annual dividend yield of 3.40% which makes the stock attractive for dividend lovers

RECOMMENDATION for next 6 months: We initiate our coverage with START SELL. The company has demonstrated a pattern of neutral to bullish technical signs, but it looks overvalued at this price level.

KMB may be a good candidate for the long term and for dividend lovers, but for short term we expect a correction as the stock has gained 17.29% year-to-date, well ahead of the S&P 500?s 7.6% year-to-date gain. Our overall score for KMB is 4.42

For options trading we suggest:

• Buy the January 2013 put with a strike of 80.00 priced at $0.37 per contract
• Net Debit to start: $0.37
• Maximum risk: Net debit

NEWS and CALENDAR

Thursday November 15, 2012 – Kimberly-Clark Declares Quarterly Dividend

Thursday November 15, 2012 – Form 8-K for KIMBERLY CLARK CORP.  Change in Directors or Principal Officers, Financial Statements and Exhibits

Wednesday November 14, 2012 – Kimberly-Clark Named Among World’s 25 Best Multinational Workplaces for Second Consecutive Year

KMB Strengths

• Global Market Leader
• Brand Name
• International Diversification

ETN Weakness

• Commodity Prices
• Rising material costs

Competitor Comparison     KMBENRPGIndustryMarket Cap:33.76B4.97B187.21B947.14MQtrly Rev Growth-0.03-0.05-0.040.11Revenue20.93B4.57B82.89B1.15BGross Margin0.330.470.500.45EBITDA3.94B703.60M19.15B167.81MOperating Margin0.140.150.190.10Net Income1.88B408.90M8.76BN/AEPS4.746.223.590.98P/E18.2012.4219.0723.75PEG1.641.072.151.58P/S1.611.092.252.16

Stock valuation model

The model rates stocks 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic value of the stock

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

KMB’s intrinsic value is $75.00 the current price is $86.28, the stock trades 12% above its fair value.

Financials

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Sentiment

Investor’s sentiment for the stock

Analyst ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

We are searching for EPS numbers that are better than the previous year’s. One dip is allowed, but the following year’s earnings should be higher than the previous year. KMB’s annual EPS for the last 5 years were 4.08, 4.05, 4.52, 4.45, 3.99 this type of earnings action is not favorable for our model

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry

KMB’s Total Debt/Equity of 125.50% is not acceptable.

EPS This Quarter VS Same Quarter Last Year

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a “good” growth company. Stocks with improving earnings are worthy of your extra attention.

KMB’s EPS growth for this quarter relative to the same quarter a year earlier is 19.20% above our target.

Annual Earnings Growth

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%.

KMB’s annual earnings growth rate over the past five years is 4.20%, below our target growth rate.

Current Price Level

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

KMB’s 52 week high is $88.25 current price is $86.28, is 2% below the 52 week high.

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.

The company has a P/E ratio of 18.20 below the average industry P/E ratio is 23.75 and is above the S&P 500 P/E ratio of 15.30.

Insider Ownership

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own 0.22% of KMB stock. Management’s representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

Technical Analysis

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

KMB is in an uptrend, is trading in the range of $82.15 – $87.80 in the past 30 days. The Commodity Channel Index (CCI) is bullish for KMB. KMB stock has been showing support around $82.60 and resistance in the $87.90 range. Our indicators give a neutral short term view and bullish long term view on KMB.