The financial markets aren’t alone – or even leading the way – when it comes to reactionary, over-the-top fear about coronavirus. Last weekend, my wife and I were making our weekly run to the grocery store to stock up on the typical essentials. While this may not surprise you, it did surprise me to see shelves normally filled with bottled water, hand sanitizer and toilet paper bare.
In the checkout line, we found ourselves behind a lady, who, by all appearances was in good health, but nonetheless wore a surgical mask with her shopping cart filled nearly to overflowing with – you guessed it – bottled water, toilet paper and other emergency storage items. While my wife sent me back to the frozen section to grab a couple of items we had forgotten, the lady glared at my wife and said, “You need to get in a different line.” My wife just smiled back and responded cooly, “No, I think I’ll stay right here.”
In the stock market, the last week has been marked by major volatility, with massive slides to the downside of 1,000 points or more in the Dow Jones Industrial Average. It marks a decline since the major indices hit their last all-time high in mid-February of nearly -20%. That is the fastest decline to near-bear-market levels since October 1987, which means that current market conditions, and its related uncertainty represent something that multiple generations of investors have never seen – and even those of older generations may not remember except in pretty abstract terms. So maybe some of the frenzy, irrational though it may be, isn’t altogether surprising.
All of the buying activity around those critical essentials, though do beg a Peter Lynch-esque value question. If demand for the household basics you and I rely is so high that supply becomes scarce, should you consider buying the stocks the provide those basic goods? Kimberly Clark Corporation (KMB) is one of the largest such publicly traded companies. While broad market volatility has led to some pretty big swings on a day-to-day basis for the stock, it has also managed to hold up relatively well, and is down only about -3% over the same period since the market is down nearly -20%. Is the stock’s fundamental and value profile, then strong enough to suggest this could be a good defensive play to make right now?
Fundamental and Value Profile
Kimberly-Clark Corporation is engaged in the manufacturing and marketing of a range of products made from natural or synthetic fibers. The Company’s segments include Personal Care, Consumer Tissue, K-C Professional and Corporate & Other. The Company’s Personal Care segment offers various solutions and products, such as disposable diapers, training and youth pants, swimpants, baby wipes, feminine and incontinence care products, and other related products. The Company’s Consumer Tissue segment offers products, such as facial and bathroom tissue, paper towels, napkins and related products. The Company’s K-C Professional segment offers solutions and supporting products, such as wipers, tissue, towels, apparel, soaps and sanitizers. The Company’s business outside North America includes Developing and Emerging Markets (D&E) and Developed Markets. It sells its products to supermarkets, mass merchandisers, drugstores, warehouse clubs and other retail outlets. KMB has a market cap of $46 billion.
Earnings and Sales Growth: Over the last twelve months, earnings for KMB increase by almost 7%, while sales were flat, but positive by about 0.3%. In the last quarter, earnings were about -7% lower, while sales slid about -1.23%. KMB’s margin profile is healthy; over the last twelve months, Net Income as a percentage of Revenues is 11.69%, and 11.92% in the last quarter. This is a useful sign of strength.
Free Cash Flow: KMB’s free cash flow is modest, at about $1.76 billion over the last twelve months. That translates to a Free Cash Flow Yield of 3.65%.
Debt to Equity: KMB has a debt/equity ratio of 32.03. This is a huge number, and very indicative of the stock’s highly leveraged position. Total long-term debt is $6.2 billion, while cash and liquid assets are just $442 million. KMB’s margin profile is a strong indication that operating profits are adequate to service their debt; however any shortfall in Net Income could present problems given the company’s limited liquidity.
Dividend: KMB pays an annual dividend of $4.28 per share. At the stock’s current price, that translates to an attractive dividend yield of about 3.04%.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $92 per share. That means the stock is significantly overvalued, with -32% downside from the stock’s current price.
Technical Profile
Here’s a look at KMB’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line marks the stock’s upward trend from May to December of last year. After peaking around $149, KMB dropped on the back of broad market volatility to support around $133 per share. The stock is pressing up against that level now, with immediate resistance back at around $145 per share.
Near-term Keys: KMB’s valuation metrics clearly show that the stock can’t be considered a strong value play right now. In fact, the stock would need to drop all the way to around $74 before any kind of realistic conversation about it being bargain can be had. The fundamental profile is generally pretty strong, and the dividend is useful; the company’s position in the Consumer Staples sector and Household Product industry does suggest it could be a useful, “safe haven” kind of investment to draw a useful, passive income if you aren’t afraid of potential stock market volatility. If the stock can bounce off of support at $133, it could offer an aggressive bullish short-term trade, either by buying the stock or working with call options, with $145 as a top-end profit target. A drop below $133 could be a reason to consider shorting the stock or buying put options, using previous pivot points between $125 and $129 as bearish profit targets.