2 for Tuesday: Cleaning Up With Kimberly-Clark

This company could grow its bottom line by more than 10% over the next five years.
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Want to invest in a well-respected

S&P 500

company that's managed to post a 500-basis-point improvement in gross margins over the past five years? What about one that's grown earnings at a 9% clip over the same period, in spite of an economic slowdown and intense competition?

Believe it or not, you can get both in one stock. Take a closer look at

Kimberly-Clark

(KMB) - Get Report

.

Sure, decreased consumer spending and lofty fiber costs have adversely affected its tissue and toilet paper sales. Sales volumes of both products are up from last year, but the average sell-side analyst was forecasting 90 days ago that the company would earn $3.38 a share in 2001 and $3.71 in 2002. Now, consensus estimates are at $3.25 a share in 2001 and $3.51 a share in 2002.

The company has partly offset these factors by instituting price increases and trimming its selling, general and administrative, or SG&A, line. It announced in late November that it would close five plants, laying off some 1,400 workers.

Reasons to Get In Now

Fair enough. But why buy Kimberly-Clark now? I've come up with several reasons.First, the company is aggressively repurchasing its common stock. Through the third quarter, it bought back 9.1 million shares at a total cost of $562 million -- implying an average price of $61.75. (Its stock closed Monday at $57.29.) You have to wonder why the board would want to use its precious capital to buy back equity unless it was convinced that better times lie ahead.

According to Kimberly-Clark's most recent proxy statement, which was filed March 15, 2001, management owns about 3.7 million shares, which isn't much, considering the 520 million-share float. But it is significant if you consider management's equity stake in proportion to its compensation.

For example, Kimberly-Clark's CEO Wayne Sanders pulled in a little more than $2.1 million in salary and bonus in 2000, yet he owns roughly 1.4 million shares. Another terrific example is CFO John Donehower, who owns a little more than 332,000 shares worth about $19.2 million. Donehower took home about $724,000 in pay in 2000. (Both stakes are still well below 1% of the total number of shares outstanding, which is 525.2 million.)

My point? Despite its enviable compensation agreements, management has a significant personal incentive to maximize shareholder value.

The bad news -- slower-than-expected sales volumes after Sept. 11 -- seems to already have been factored into the stock. Kimberly-Clark appears to be on target to meet or beat the average consensus per-share estimates for 2001 and 2002, implying an 8% growth rate.

Growth Segments

The company's efforts to expand its market share in the lucrative $4.6 billion European diaper market could pay off big-time. By offering a new super-absorbent diaper, Kimberly-Clark could tack 2 or 3 percentage points onto its current 25% market share over the next couple of years, according to some analysts' forecasts. This in turn could lead to an upside earnings surprise.

After speaking with several folks on both the buy and sell sides, I get the sense that pulp prices will be more favorable in 2002. In 2001, Kimberly-Clark paid close to $575 a ton for pulp. In 2002, the average price may be somewhere in the $550 range. This will undoubtedly boost margins.

Kimberly-Clark is a solid company that investors have largely ignored. However, as the company expands its presence in Europe, and as domestic consumer spending picks up, it could realistically grow its bottom line by more than 10% over the coming five years. Given its size and operating history, that's pretty darn impressive.

For more information about Kimberly-Clark or some of my other top value picks, be sure to sign up for a free two-week trial to my newsletter, Era Of Value.

In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Curtis welcomes your feedback and invites you to send it to

Glenn Curtis.