Doug Kass: Going Long Kimberly-Clark Is Definitely Worth the Headache
Here's my case for investing in KMB amid its proposed buy of Tylenol maker Kenvue — and where I see it trading in the future.
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Tissue and personal care company Kimberly-Clark's (KMB) proposed acquisition of Kenvue (KVUE) is transformational. And it's a reason why I'm placing KMB on my buy list.
Kimberly-Clark has a $34 billion market cap; KVUE, a dominant player in the consumer health sector, has a current market cap of $32 billion. Under the deal, Kimberly-Clark is paying $3.50/share in cash and 0.14635 of its shares per KVUE share.
While execution challenges in integrating the two companies are front and center, KMB has paid a very reasonable price. Indeed, it's paying well below — 19% less than — the share price of six months ago and 14% below the price from a year ago in its desire to accelerate top- and bottom-line growth.
The sharp, nearly 15% drop, in the share price at the time of the proposal's announcement reflects investor skepticism. But I would note that the company has managed well through a difficult industry the last few years — gaining market share (in both the U.S. and China) through successful innovation and with excellent results in both value and premium tiers.
I expect Kimberly-Clark will aggressively address the need to prune and reinvigorate Kenvue's expansive suite of brands.
Given the large dividend yield and the depressed pro-forma valuation of KMB (12.5-times 2028 proforma), I believe there is a reasonable "margin of safety" with a most attractive reward vs. risk proposition.
Besides the protection of a low price/earnings multiple:
* Kimberly-Clark gains exposure to health/wellness, the consumer shift toward self-managed health and an aging global population.
* Kenvue's portfolio is generally seen as underused — the opportunity to reinvigorate the company's moribund brands is high.
* Kenvue is already in the middle of a strategic overhaul — as it reduces the bottom third of its SKUs and focuses on its core brands that drive 3/4 of its aggregate sales.
* Kenvue's geographic footprint (43% of sales from emerging markets) provides an opportunity to scale.
* The Tylenol issue may be overblown. Management has done a deep legal, medical and regulatory dive on the Tylenol litigation threat. From management, it has undertaken "incredible rigor, thoughtfulness and discipline" in assessing this risk. The company has determined that the financial and strategic benefits eclipse the risks. I agree.
* Synergy opportunities are great. The deal should be accretive to earnings per share by 2028 (at least +5%) based on the company's ambitious synergy estimate (assuming between $1.5 billion to $1.7 billion of synergies). This might be conservative. If the company's synergies are realized, earnings accretion will be far better.
* The defensive nature of consumer packaged goods stocks (long underperformers) is compelling in an arguably overvalued stock market.
In the fullness of time I expect KMB's shares to trade between $125-$135/share (15-times to 17-times 2028 Pro Forma EPS).
I plan to build a large-sized position in Kimberly-Clark.
This commentary was originally posted in Doug's Daily Diary on TheStreet Pro.
At the time of publication, Kass was long KMB (M).
