Monday, February 28, 2011

Kimberly-Clark: $KMB valuation update

Kimberly-Clark ($KMB) filed a 10K annual report for 2010 recently so here's an update to the cash flow valuation I posted February 1.  This update incorporates the firm's year-end 2010 data.  I believe $KMB is undervalued now at $66/share and fairly valued at $82/share on a cash flow valuation basis.    

Kimberly-Clark is a leading player in the global health and hygiene category selling bathroom tissues, diapers, feminine products, and paper towels. Its brands include Kleenex, Scott, Huggies, Pull-Ups, and Kotex. Kimberly sells its products directly and distributes them through supermarkets, mass merchandisers, and drugstores, among other outlets. Sales generated outside of North America account for about 45% of the firm's consolidated sales base.

I estimated the firm's WACC today at 6.94% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
YearFCF $Millions
Average Annual Growth: approx 11%
CAGR: approx. 6%
Consensus Forecast Industry 5-Year Growth: approx. 13% per year
Consensus Forecast Company 5-Year Growth: approx. 9% per year
Assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
YearFCF $ Millions
Terminal Value43011

The firm's future cash flows, discounted at a WACC of 6.94%, give a present value for the entire firm (Debt + Equity) of $40,179 million. If the firm's fair value of debt is estimated at $7000 million, then the fair value of the firm's equity could be $33,179 million.  $33,179 million / 404 million outstanding shares is approximately $82 per share and a 20% margin of safety is $66/share.

All else being equal, if you assume a lower 5-year growth rate in FCF of 6% per year (instead of 9%) with 0% growth thereafter, the fair value for $KMB on a cash flow valuation basis is $69/share and a 20% margin of safety is $55/share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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