Dot.com, AI and…Kimberly-Clark

These inefficiencies represent opportunities for patient investors. In two recent pieces we highlighted the uncommon relative value available in blue-chip staples stocks. The data is clear: today is one of the best times in over 30 years to buy select names in the sector.

If the market continues to soar on the back of a concentrated group of tech stocks, the Staples stocks we have highlighted will underperform. But as we have explained, over the long haul, these companies have been safe and potent compounding vehicles. With that context, let’s dig into one of our top Staples picks.

Our data suggests Kimberly-Clark (KMB) offers uncommon value. From 12/31/2022 through today, KMB has risen only 3% vs. the S&P up 60% and the Nasdaq up 84%. New technologies can change the world. But changing the world does not necessarily make for good investing.

The last time we saw investors this infatuated with tech stocks based on allegedly glamorous futures was in the dot.com bubble. Much like today, by the peak of the dot.com bubble, few things could have been less interesting than the venerable maker of Kleenex tissues. Yet in that moment, you would have been very well served investing in KMB. Consider the chart below:

Those who bought the exciting Nasdaq Index, suffered an -82% drawdown and it took over a dozen years to break-even. In contrast, investors in boring old Kimberly Clark saw their investment grind relentlessly higher.

From the peak of the dot.com bubble through today, investors in the Nasdaq are still lagging KMB.

Is today early 2000 or is it 1997? We don’t know. But what we do know is that since this cycle’s growth bubble broke out in early 2017, the Nasdaq has risen 279% vs. KMB rising only 49%. And as we watch AI superstar SMCI implode on allegations of fraud, (something we flagged our investors on) we prod our readers to visit our work Accounting Gimmicks on a Grand Scale. SMCI represented ~11% of Nvidia’s sales in Q2.

KMB’s key products are a list of branded items you cannot stop buying. They include:

• personal care products (e.g., Huggies®️, Kotex®️, Poise®️, and Depend®);
• facial and bathroom tissue and paper towels (e.g., Kleenex®️, Scott®, Cottonelle®️, and Viva®️);
• various soaps, sanitizers, and personal protective equipment.

Why We are Bullish on KMB by the Numbers:

• At ~6%, KMB’s free cash flow yield is higher than 82% of other large cap companies
• KMB’s ~4% dividend yield is higher than 84% of other large cap companies
• Investors also get a 2% “kicker” via a buyback at a valuation that strikes us as compelling
• Our multi-factor earnings quality score puts KMB’s accounting integrity in the top 2% of all large cap firms
• The company continues to surprise analysts to the upside forcing a virtuous cycle of positive revisions [1]

What KMB lacks in novelty it makes up for in powerful cash generation, payments to shareholders via both dividends and buybacks, high quality earnings and growth that continues to surprise the street.

Qualitative Factors Underpinning our Bull Case:

Powerful Brands: Many of KMB’s brands have the largest or second largest global market share within their product category, often controlling 20% – 30% market share. More details to follow.

A Terrific “Self-Help” Story: Earlier this year KMB released a long-term plan to grow top line while optimizing costs. The company expects the use of powerful data analytics to drive billions in productivity while reducing working capital requirements by nearly half-a-billion. Management believes achieving these goals can drive long-term profit growth in the mid-to-high single digit range. More details to follow.

Investor Psychology: From 2022 through 2023, KMB delivered a string of unit volume sales numbers that disappointed investors. We believe investors are suffering from excessive extrapolation, have become too pessimistic on the stock, and the recent reversal of these trends is being ignored. Why?

In 2024, KMB is on track to dramatically exceed these targets. KMB’s free cash flow has increased by about a third, or $1 billion, equivalent to $3 per share, in just two years. Would it not be ironic if the big-data AI story proved a potent tailwind to the maker of Kleenex? More details to follow.

Cyclical Safe Harbor: KCR avoids forecasts and punditry. But we can acknowledge that this market cycle has been one of the longest in modern history. As this research will show, if the US is in the late stage of the business cycle or on the brink of a recession, Staples stocks like KMB may provide both the prospect of participating in future upside with far less downside risk. More details to follow.

What is the Bear Case? The principal risk to an investment in KMB shares is, in our view, primarily timing considerations. It is possible that investors could continue to favor more economically sensitive stocks over consumer staples shares in the short term. If this happens, KMB will continue to lag the broader benchmarks. We would also be remiss not to mention the potentially heated and populist political rhetoric from both parties featuring various price controls that could be a negative for Staples.

Despite these risks, KCR believes Kimberly-Clarke’s discount valuation, along with its solid and predictable growth prospects, should allow KMB to attract investors under any economic scenario.

Below we provide supporting commentary and data for the items discussed above.