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Kimberly Clarke Corp (KMB) (Spin off)

Guest JoelS

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Guest JoelS

From Horizon Kinetic's spin off report in February:




" Kimberly-Clark plans to spin off its healthcare business known as K-C Health Care from Kimberly-Clark, a company known to everyone. It makes products that are in constant demand, including Huggies, Pull-Ups (diapers), Kleenex tissues, Viva paper towels, Scott paper, Depend adult diapers, Kotex, and lesser-known brands such as for electronic towel dispensers. Consequently, because of the stability of the earnings, the company has earned a 17.9x P/E on what analysts would estimate to be the 2014 earnings.

Much more importantly, the company has a reputation for earnings stability. That does not necessarily mean consistent earnings growth. For example, earnings plateaued for a while in 2009, and the recession did Kimberly-Clark in some way impact, albeit modestly. It is only in 2013 and, as projected, 2014 that Kimberly-Clark’s earnings were able to reach new records. That brings us to the health care business, which differs from the other units of Kimberly-Clark. The health care business, to a very large extent, is comprised of products related to surgery and infection prevention. As a generalization, these products are commodities to some degree. That end of the health care spectrum does not have branded products, because they are bought in bulk by huge hospital companies. Furthermore, as a group, those products unquestionably will face pricing pressures, if they are not doing so already.

The next point we need to highlight is the intense effort by the government to reduce hospital stays to control costs. It is almost certain that eventually this effort will negatively affect this unit. One could argue that it has already begun to affect it. Even though the international unit of K-C Health managed to achieve 10% revenue growth in the third quarter, K-C Health only grew by 2.6% overall. That suggests the pressures already are becoming apparent.


As far as what ultimately will become the parent company, there is already some very rapid growth. For example, the diaper business recently grew 45% in China, 25% in Russia, 20% in Brazil. That is because diapers are new products, to some degree, in those countries.


This spin-off is designed to further the prospects of the parent company. The parent company is removing a business that represents approximately 40% of the revenue of Kimberly-Clark as a whole, thereby—perhaps, if all is done right—surfacing the higher growth rate of some areas within Kimberly-Clark to a lower revenue base, and thereby exposing this improvement to the view of the shareholders. It is clearly a move designed to further the prospects of the parent company. As such, it has a pretty good chance of being successful. A good investment in the Kimberly-Clark spin-off is to hold onto the parent company, which probably will have a higher growth rate than has been the case in recent years."


The distribution is expected to be completed in October.


Anyone invested or have thoughts on valuation?


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