Unscrambling Monday's Egg

Unscrambling Kimberly-Clark (NYSE: KMB)

Putting Kimberly-Clark through the Chicks' Dozen
by Chick Megan

NOTE: For the month of June, we will be going into detail on the companies that we recently considered for our quarterly Chick "buy." June was the month of buying. We ended up purchasing stock in Medtronic (MDT) on June 3, 2001, but there were many many great companies that didn't get our majority vote. We wanted to highlight them as it was a close call and they are still up for consideration for our next buy in September. For more on the companies that were considered, and what we'll be featuring all month, check out our summary.

First of all some good news; my due date has been moved up to July 30. Now there's a reason to celebrate! If you've walked in my shoes before, you're well aware of where I stand right now. I am much more like a Duck than a Chick, in terms of how I walk anyway. I am so anxious I could burst. Anxious about the health of the baby, anxious about having three children, anxious about my weight gain... all that typical stuff. And then of course there's the expense of hospital bills and formula and yes, you guessed it... diapers. Which brings me to my company of choice for this week...

Kimberly-Clark. No, no, no, that's not the name I've chosen for my little bundle of joy; it's the company that makes that wonderful disposable diaper Huggies. I figured (kind of an oxymoron, hey? Using "I" and "figure" in the same sentence) there was no better time than the present to Unscramble a well-known diaper company as a tribute to the upcoming birth of my next child. C'mon Chicks, let's crack it open!

1. Buy What You Know   Maybe you've never heard of the company name, Kimberly-Clark (KMB: NYSE), but my gut, which is immense and full of instinct (as well as pasta), tells me you've heard of any number of their popular products.  Between Huggies, Kleenex, Scott, Viva, Kotex, Pull-Ups, Depends and Poise it's a sure thing you either know them or have used them in your lifetime. Unless you're in the medical field you may not have known that they also manufacture medical gloves, surgical drapes and gowns, and sterilization wraps, too. These guys seem to have it all covered.

2. Keep It Simple Sister   Could I explain this industry to a child? Duh... they may wear these products or be wiped by them. They've certainly seen their share of messes cleaned up by them. Yeah, they get it.

3. Industry   Back to diapers, there was a time when many people were trying to get the rest of us to revert back to cloth diapers. Sorry, but I'll be honest. I simply could not be convinced of that. And as for feminine protection... uh-uh. That makes me hyperventilate. Apparently most people would agree with that because that particular movement never succeeded. So will this industry continue to grow? Yes, thank goodness, yes!

4. Leader in its field   On Marketguide.com, KMB is ranked number 1 out of the top 40 companies in the paper and paper products industry ranked in order of descending market capitalization. Also, 76 of their products are currently ranked either number or 1 or number 2, globally. Enough said.

5. Repeat Profitability  This is a no-brainer. As long as we have babies, menstrual cycles, spills and urinary incontinence, there will be a need. This need will have to be filled almost as often as a diaper. Not really... but it could be as often as daily and certainly weekly and monthly.

6. Gross Margin

Sales - Cost of Goods Sold / Sales

Sales (3608.4) - Cost of Goods Sold (2151) = 1457.4

1457.4 / Sales (3608.4) = 40.39%

The Chicks standards ask for a Gross Margin of at least 50%. KMB is only a Velcro strip short of our standard.

7. Net Margin

Net Income / Sales

Net Income (433.4) / Sales (3608.4) = 12.01%

Normally all we're asking for is 8%. Here, these guys aren't only covering butts, they're kicking them!

8. Cash vs. Long Term Debt

Cash (277.5) / Long Term Debt (2010) = .13x

Okay, so they've got a little long-term debt. Remember that they have expensive plants to run, which makes the next equation even more critical.

9. Flow Ratio

(Current Assets - Cash) / (Current Liabilities - Short Term Debt)

(3721.9 - 277.5) / (3941.1 - 1106) = 1.21

Success!!!  See, we like to see a flow ratio come in at under 1.50. This would show us that the company manages their product and cash flow well. They don't have lots of diapers sitting on their shelves.

10. Increasing Growth 

(Sales this quarter - Sales last quarter) / Sales last quarter

Sales this quarter (3608.4) - Sales last quarter (3600.8) = x (7.6)

X (7.6) / Sales last quarter (3600.8) = .002%

Okay, not a huge margin, but at least it's moving in the right direction!

11. Strong Management and Operating History  Chairman/CEO Wayne Sanders has been in that position since 1991. Prior to that he was President and COO and with the company since 1975. Mr. Sanders is also very popular in Chick Karin's book, as he also sits on the Board at Coors Brewing Company.

As of 03/31/01, Net Sales were up for KMB 7% to $3.61 billion. Net Income fell 8% to $433.4 million... this had something to do with the absence of a patent settlement income. Don't be discouraged, grab a Kleenex, campers... KMB is still breaking records. Earnings Per Share from operations was up .84 cents... up 5% compared with 2000.

12. Buy on Sale
52 Week High: $73.25
52 Week Low: $49.97
Current Price:  $59.92