4 Reasons to Give This Blue Chip Another Look

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sometimes finding a winning investment is less about discovering the next big thing, and more about finding a good value in an already strong company. While a large blue chip stock like Kimberly-Clark (NYSE: KMB) won’t win a prize for the most exciting company, or the fastest growth rate, there is a lot to like about a company that makes money cleaning up other people’s messes.

Goliath Versus Goliath

In many industries you’ll hear analysts suggest that the battle between two companies is a fight between David and Goliath. However, in the personal care industry, investors are treated to a battle of industry titans on a quarter to quarter basis. Kimberly-Clark is arguably one of the lesser-known companies of the industry, which includes Procter & Gamble (NYSE: PG), Colgate-Palmolive (NYSE: CL), and Clorox (NYSE: CLX).

When your competitors offer brands such as Pampers, Colgate, and Clorox, and those are just a few of their offerings, you know you’re fighting with the big boys. Though Kimberly-Clark offers well-known brands like Huggies and Kleenex, you can see the company faces competition unlike in any other industry.

Organic Growth, and I’m Not Talking about Food

When large companies report earnings, many times you’ll see the words “organic growth” mentioned. However, companies have different definitions of what constitutes organic growth. For instance, at some point it became acceptable to refer to revenue growth based solely on price increases as “organic.” I would suggest that real organic growth is when a company sells increased volume of their product, as this indicates increased demand from consumers.

This leads us to one of the main reasons investors should take a look at Kimberly-Clark: the company is reporting strong volume growth at its two most important divisions, and not just increasing prices. In their last earnings report Kimberly-Clark reported a 3% volume increase in their personal care division, and a 4% increase in their consumer tissue segment.

By comparison, Clorox saw volume increases of just 1% at most of its divisions. Procter & Gamble saw mixed results, with beauty and grooming volume decreasing, while baby volume increased. Of Kimberly-Clark’s peer group, the only company with clear strength across the board was Colgate-Palmolive, which saw volume increases of at least 3.5% in most of its geographies.

Second Best but a Strong Combination

When a company can claim to offer neither the highest yield, nor the fastest growth rate, you might expect investors to ignore the stock. However, things are rarely that simple and it makes a lot more sense to look at the overall value being offered as opposed to just one number.

The second reason investors should take a look at Kimberly-Clark's shares is the company’s relatively strong yield versus their peer group. At the present time, investors are being offered a yield of about 3.2% from Kimberly-Clark, and the only company in their peer group offering a better yield is Clorox at about 3.3%. Procter & Gamble’s 3% yield, and Colgate-Palmolive’s 2.3% yield are respectable, but every little bit helps in a low interest rate environment like we’re in today.

A third positive behind Kimberly-Clark’s stock is analysts generally expect reasonably strong earnings growth over the next several years. In fact, of its peer group the only company offering a stronger expected growth rate is Colgate-Palmolive at around 9%. However, with competitors like Clorox and Procter & Gamble expected to grow EPS by 7.2% and 7.6% respectively, Kimberly-Clark’s 7.8% expected growth rate looks pretty good.

Can Investors Clean up With This Stock?

We’ve already seen that Kimberly-Clark offers a decent yield, good growth in earnings, and strong organic growth. While the company isn’t the best in any of these three categories, the combination of these traits seems better than their peers. If investors are looking for proof that Kimberly-Clark is a better value, the PEG + Y ratio can provide that assurance.

Peter Lynch used the PEG + Y ratio to compare companies using both their dividend yield and their expected growth rate. Unlike the PEG ratio, the higher the number the better. A high PEG + Y ratio suggests a better combination of growth and income relative to the stock’s valuation.

Kimberly-Clark’s 3.2% yield and 7.8% expected growth rate compares favorably to the stock’s roughly 17 P/E ratio. Using these numbers, the company’s PEG + Y ratio is 0.64. While Lynch’s ideal was a ratio above one, Kimberly-Clark has the best ratio of its peer group.

By comparison, Clorox scores a 0.53 because of its slightly higher yield but lower growth rate and higher P/E ratio. Procter & Gamble scores a 0.54, because the stock has a lower yield, lower growth rate, and higher P/E ratio. Colgate-Palmolive finishes second, because the company’s lower yield, but faster growth rate, somewhat offsets the company’s P/E ratio of over 20.

In the end, Kimberly-Clark's better valuation is the fourth reason investors should consider adding this stock to their Watchlist. The company is not the most exciting in its industry, won’t get a lot of attention from the press, and may not seem exciting, but over time the stock’s returns should be anything but boring for long-term investors.

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Chad Henage owns shares of Colgate-Palmolive. The Motley Fool recommends Kimberly-Clark and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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