At the core of Kimberly-Clark's (NYSE: KMB) business are babies all over the world pooping on the company's products. Not that that's a problem -- at least, not when those products are Huggies and Pull-Ups diapers.

Kimberly-Clark may not have the company cachet of a Procter & Gamble (NYSE: PG) or even a Colgate-Palmolive (NYSE: CL), but that's not for lack of strong brands. K-C's brand portfolio is anchored with rock-solid names like Huggies, Kleenex, Scott, and Kotex. In addition, the company brings in almost a quarter of its sales through the professional and health-care markets.

Shares of Kimberly-Clark currently change hands at a bit more than $65 per share. Is that a good deal? Well, first we need to get an idea of what K-C's shares are really worth.

It's a beautiful day in the neighborhood
One way to get an idea of what a stock might be worth is to check out how similar companies are valued. So let's take a look at how K-C stacks up.


Total Enterprise Value / Trailing Revenue

Price / Trailing Earnings

Price / Forward Earnings

Trailing PEG






Alberto-Culver (NYSE: ACV)





Church & Dwight (NYSE: CHD)





Clorox (NYSE: CLX)










Energizer Holdings (NYSE: ENR)





Procter & Gamble










Source: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance. Average excludes Kimberly-Clark.

Using each of those averages to back into a stock price for Kimberly-Clark, and then taking the average across those results, we can come up with an estimated price per share of right around $73. This would suggest that K-C may be moderately undervalued.

For obvious reasons, investors tend to reward faster-growing companies with higher valuation multiples. This is pretty clearly the case here. With analysts currently estimating that Kimberly-Clark will grow its bottom line at just over 8% per year in the coming years, the company is pegged to be the slowest grower of the group.

Of course, these are all large consumer staples companies, and none of them is expected to deliver truly scorching growth -- Alberto-Culver has the highest expected growth rate at 13%, while both Clorox and Energizer are expected to grow around 10% per year. It would seem to me that investors may not be giving K-C's stock quite enough credit.

Collecting the cash flow
An alternate way to value a stock is to do what is known as a discounted cash flow analysis. Basically, this method projects free cash flow over the next 10 years and discounts the tally from each of those years back to what it would be worth today (since a dollar tomorrow is worth less to us than a dollar today).

Because a DCF is based largely on estimates (aka guesses) and it attempts to predict the future, it can be a fickle beast, and so its results are best used as guideposts rather than written-in-stone answers sent down from Mount Olympus.

For Kimberly-Clark's DCF, I used the following assumptions:

2010 Unlevered Free Cash Flow

$2.3 billion

FCF Growth 2010-2014


FCF Growth 2015-2019


Terminal Growth


Market Equity as a Percentage of Total Capitalization


Cost of Equity


Cost of Debt


Weighted Average Cost of Capital


Source: Capital IQ, a division of Standard & Poor's, Yahoo! Finance, and author's estimates.

While most of this is pretty standard fare when it comes to DCFs, the academically inclined would probably balk at the way I set the cost of equity. In a "classic" DCF, the cost of equity is set based on an equation that uses beta -- a measure of how volatile a stock is versus the rest of the market -- and a few other numbers that I tend to thumb my nose at.

But when you get right down to it, the cost of equity is the rate of return that investors demand to invest in the equity of that company. So I generally set the cost of equity equal to the rate of return that I'd like to see from that stock.

Based on the assumptions above, a simple DCF model spits out a per-share value of $75 for K-C's stock. This appears to reinforce the idea that the stock is currently undervalued.

Now I should note for those following along at home, I actually adjusted down K-C's growth rate for the DCF versus current analyst expectations. The reason is that the number coming from Wall Street seemed a little optimistic to me -- particularly when the company itself is expecting earnings growth in the "mid- to high-single-digits" range. Of course, if analysts' targets are more accurate, then that only means that K-C is even more undervalued today.

Do we have a winner?
The valuations that we've done here are pretty simple and, particularly when it comes to the DCF, investors would be well advised to play with the numbers further before making a final decision on Kimberly-Clark's stock.

That said, the range of $73 to $75 that we got from the two valuation methods seem to say that K-C's stock is undervalued right now. At the midpoint between the two estimates we get $74 -- 13% above today's stock price.

Kimberly-Clark is a stable company with a portfolio of strong brands, opportunity to grow internationally, and is a member of Standard & Poor's "dividend aristocrats." With Mr. Market currently giving investors a discount on the stock, this is one that I think should be on everybody's radar.

Do you agree that Kimberly-Clark's stock is undervalued? Head down to the comments section and share your thoughts.

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