In this article, let's take a look at Kimberly-Clark Corporation (KMB, Financial), a $39.44 billion market cap company, which is best known for brands such as Kleenex, Scott, Huggies and Kotex.
Extensive Reach
The company sells products in more than 150 countries, operating as a broadly diversified portfolio. It operates four segments: Personal Care (49% of 2014 sales); Consumer Tissue (34%); K-C Professional & Other (17%).
The company spun off its Health Care business in the fourth quarter of 2014, which accounted for about 8%. We think this should help the company to focus on its highest-return businesses and optimize the rest of the portfolio.
Promising Markets
Despite a portfolio of well-known brands, the company faces external risk, like exchange rate risk from its international operations. But, we believe double-digit growth will come from emerging markets, where income is becoming higher. Now it accounts for nearly 40% of total sales, and we expect far more in the long run. For example, Venezuela accounted for 2% of Kimberly's consolidated sales in fiscal 2012 but 4% of operating profits
Revenues, Margins and Profitability
Looking at profitability, revenues declined by 9% led earnings per share decreased in the fourth quarter compared to the same quarter a year ago (-$0.18 vs $1.40). During the past fiscal year, the company reported lower earnings of $3.90 vs $5.54 in the previous year. This year, Wall Street expects an improvement in earnings ($5.70 versus $3.90).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| KMB | Kimberly-Clark | 39.88 |
| CHD | Church& Dwight Company, Inc. | 19.48 |
| ENR | Energizer Holdings Inc | 13.93 |
| CL | Colgate-Palmolive Co | 131.66 |
| PG | Procter & Gamble Co | 14.12 |
| Â | Industry Median | 8.50 |
The company has a current ROE of 39.88% which is higher than the industry median. Also, it is higher than ones exhibit by Church & Dwight (CHD, Financial), Energizer Holdings (ENR, Financial) and Procter & Gamble (PG, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Colgate-Palmolive (CL, Financial) is a very good option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
| Year | ROE (%) |
| Dec-05 | 25.74 |
| Dec-06 | 25.73 |
| Dec-07 | 32.2 |
| Dec-08 | 37.14 |
| Dec-09 | 40.59 |
| Dec-10 | 32.55 |
| Dec-11 | 28.5 |
| Dec-12 | 34.2 |
| Dec-13 | 43.53 |
| Dec-14 | 54.65 |
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 26.4x, trading at a premium compared to an average of 27.0x for the industry. To use another metric, its price-to-book ratio of 54.27x indicates a premium versus the industry average of 2.10x while the price-to-sales ratio of 2.04x is above the industry average of 1.13x.
Final Comment
Despite the fact that the firm could face a scenario of slow economic growth and worst of all, unfavorable demographics, we believe long-term growth will come by the expansion on emerging markets as well as focusing on non-traditional categories.
The return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Joel Greenblatt, Jim Simons, Ken Fisher, John Buckingham and Bill Frels have added this stock to their portfolios in the fourth quarter of 2014, as well as Diamond Hill Capital.
Disclosure: Omar Venerio holds no position in any stocks mentioned
