Is Kimberly-Clark - KMB - a Value Stock?
Kind of. Maybe? Let’s discuss.
After two weeks looking at several hundred potential racehorses at the Keeneland yearling sale, it is time to “get back on the horse” again. (note the clever semi-pun)
I am very happy with the Top 20 Model Portfolio, and I will review it again at quarter end.
For right now let’s do a little thought exercise. With the market at all-time highs, and the eggheads at The Federal Reserve pursuing a strategy that could best be described as “calamitous”, let’s try to conjure up the least risky stock possible.
If you are following along you might remember Antero Midstream - AM, from a few weeks ago. That might be the least risky stock I can think of, but with a market cap under $10 billion, let’s try to come with a a name someone has heard of.
In the olden days I might have suggested electric utilities, but two things have changed. First we all know that “yield whores” have bid utility stocks to near their all time high valuations. Secondly, I fear the the state rating agencies have become infected with anti-business populists that make it tough for many utilities to earn their “allowed” rate of return, and at the same time the regulators are forcing these companies to invest in wind/solar.
So let’s try to find a large cap company with as little exposure to economic activity as possible, a pristine balance sheet, low expectations, and some possible upside.
Let me suggest Kimberly-Clark, as a substitute for an electric utility.
KMB aspires to be a consistent “mid to high single digit grower”, but the most recent 20 years shows that KMB is most likely just a mid single digit grower (4-6%). In the old days that is exactly what we hoped for from our utility investments.
Let’s list KMB’s positives:
Tissues, diapers, and feminine hygiene products, are about as anti-cyclical as any industry.
KMB has an interest coverage ratio over 10x, and Debt/EBITDA under 2x
KMB has made no silly acquisitions since it bought Scott’s in 1995
KMB has low expectations, only 7 buys vs. 14 hold/sells
Much of KMB’s recent underperformance can be attributed to the strong US dollar.
KMB got a new CEO just before COVID, and a new CFO last year. At a recent investor day, they have outlined and ambitious cost cutting plan. There is a glimmer of hope from new products, and a real chance to reach high single digit growth if the dollar cooperates.
You get a 3.5% yield while you wait for something positive to happen,
The only negative is you have to pay 19x earning for KMB, and I am a cheap old bastard that would like to only pay 13-15x for this growth profile
But what the %&$#&%#@ is the alternative? If you pointed a gun at my head (please stop doing that), I would rather own KMB than any electric utility that I can find. By a fairly small margin I still prefer Kinder Morgan - KMI, or Rayonier - RYN, but KMB is coming up fast on the outside. (again, note cute horse racing semi-pun).
Any wise value investor should at least think about KMB.
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The Noxious Nine collapsed to 0-3 last weekend. I did that to remind you how dangerous it is to play the hot hand ( I had been 4-1).
This week :
a double play on underwhelming Florida -6 at Miss St. (In the old days this was great play because the kids feared they might lose their scholarship if the coach got fired, but with the transfer portal this has changed)
Colorado State -8.5 vs UTEP (U take’m points, university)
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I did not find a racehorse to invest in. Prices were up over 10%. Yes, there is inflation in horse prices.
Just for fun let’s follow a few :
Hip #1785 (they will get cute names next Spring) - My favorite value sire is Honor AP. The top partnership group paid only $140,000 for this guy. This was the horse I wrote about last week whose mother’s name was Rutile (the mineral used to make titanium dioxide). Hip #2319 is another son of Honor AP bought by a top trainer for only $100,000.
For you growth stock folks, the star of show was new sire Charlatan. Let’s watch hip #70 that a rich guy paid $1,400,000 for, or hip #668 that a smart partnership paid “only” $350,000 for. Charlatan’s babies looked really athletic, and like they would like to run “two turns'‘ (races of 1 mile or more).