Citi analyst Chip Dillon has upgraded Kimberly-Clark (KMB) to BUY and believes the global health and hygiene company has the potential for an easy 15% return (including dividend).
Dillon is quick to remind us that on July 14th, the day before the market bottomed (and the day oil prices peaked), Kimberly-Clark cut guidance for 2008, calling for an operating EPS range of $4.20-$4.30 (down from $4.45-$4.60 since January). This was the first downward guidance for KMB since late 2002.
Since then, according to Dillon, “Everything Just Turned!”:
Since the day of the KMB pre-announcement, almost everything has turned sharply: oil prices are down 30%, nat. gas is down more than 40%, pulp prices are down 3%-5%, and most of KMB’s product prices are rising.
KMB is uniquely positioned to capitalise on these commodity price declines:
Among the CPG companies, Kimberly-Clark is about the biggest beneficiary from falling materials and energy prices, given its high exposure to these costs. (Tissue is almost all pulp and energy; how expensive are these items relative to the cost of, say, perfume or Wheaties?)
A stronger dollar is just fine:
The rising dollar could soon prove a drag on major US-based CPG companies as a large percentage of earnings typically comes from developed countries overseas. KMB gets just 30% of earnings from outside North America (including Mexico), with most of this from developing countries (whose currencies have generally not fallen as much in recent weeks).
Dillon says this is the first time Citi has recommended the stock since they downgraded it from Buy to Hold on February 14, 2005 (when KMB was $68.15 and the S&P 500 was 1206). Citi deserves a nice pat on the back for that call–and gives itself one.
Citi upgrades Kimberly-Clark (KMB) from Hold to BUY, target raised from $60 to $71.
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