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The Good, Bad and Ugly: KMB


Bless you Red!


Taking a bigger picture look at Kimberly Clark (KMB) the company had a very good quarter. Total sales were up 7% (after adjustments for Neenah Paper spin off), volumes were up 4%, prices were up 1% and declining dollar only helped sales by 2% - producing 5% organic sales growth. Though some segments have more pricing power than others, KMB was still able to raise prices and enjoy a healthy volume growth at the same time - a rare quality for consumer companies in this day and age. Let's take a closer look at some of KMB's business segments...

Personal Care: The diaper war has migrated to Europe from US as prices declined 8% and volumes were up 7%. KMB went through a similar war in the US a couple of years ago (prices stopped declining in the US and were flat in the quarter), which proved to be a great buying opportunity of the stock at the time (not advice). KMB may not win the war but it won't lose it either as it has a very competitive cost structure and very strong brand names.

Tissues segment was strongest performer in the quarter with organic sales growth of 6% (volume up 4%, prices up 2%). Performance was strong across the globe with a mild 1% price decline in Europe but gangbuster double-digit growth in Latin America and Asia.

B2B performance was not very exciting with organic sales growth of only 2% - it takes longer for price increase to channel through in this business.

KMB is like any manufacturer that converts commodities into branded products, it is facing a problem with higher oil and gas prices. However, the company is not whining about it but rather it is taking very aggressive steps to take out costs out of the business. Specifically it is closing and consolidating factories; this was the major source of charges in the quarter (most of which were non cash). In the quarter $45 million of cost saving from improved efficiency were negated by a $90 mln ($50 higher polymer resins, $20 - energy, $20 - transportation) rise in commodity costs. Management expects efficiency savings to accelerate in 2006 and to reach $300-350 million in 2009.

On the flip side of the coin, if oil prices returned to pre hysterical levels, KMB's margins are likely to be much higher as the company is more efficient and price increases are likely to stick, at least for awhile.

KMB is putting its cash flows to use by paying a decent dividend (3.2%) and buying back stock. It bought 15.7 million shares year to date, expecting to buy $1.5 billion (approximately 5%) of its stock this year which will be done from its free cash flows.

A note of caution: This quarter's cash flows were down from last year's due to timing of tax payment, though this is likely to be the case as operating cash flows are very volatile especially quarter to quarter, we'll need pay close attention next quarter.

Last time when I discussed KMB, I mentioned that stock did not have a significant margin of safety; it does now, based on both absolute and relative valuation models that we run.

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