Kleenex brand trading at $63.20 down to a near low from 52-week high of $72.79. The trailing p/e of 15 was low by historical standards. This is as cheap as it gets for this company claimed a portfolio manager. In 2007, Kimberly Clark grew sales by 9 percent compared with just over 5 percent the year before. Even though it absorbed increased raw material cost without increasing prices, the firm grew operating profit by 24.5 percent. Analysts expected that the firm would be able to pass those costs on to customer from 2008-2009 further accelerating earnings growth benefits from the firm's competitive improvement initiative and strategic cost reduction plan, both begun in 2005 to streamline marketing, manufacturing and administrative operations, were evident, and its research and development operation was producing new products like good nites sleep boxers and sleepshorts disposable training pants. At the time, the consensus analyst estimate of earnings per share for the year ending December 31, 2008 was $4.54 and $4.96 for 2009 up from the $4.13 earnings per share reported for 2007. At the end of 2007, the firm also reported book value of 5,224 million on 420.9 million in outstanding share value. Morningstar, a provider of financial information and mutual fund rankings, was forecasting a dividend of $2.32 per share for 2008.
a. Calculate the forward p/e and price to book (p/b) at which Kimberley-Clark was trading.
b. Using the analyst forecast value KMB with and additional forecast that residual earnings will grow at the GDP growth rate of 4 percent per year after 2009. Use a required return of 9 percent.
c. The dividend payout ratio for 2008 is expected to be maintained in 2009. based on your calculations what target price would your forecast for the end of 2009?
Forward P/E = $63.20/$4.54 = 13.92 times
Forward P/B = $63.20/[($5,224 million + ($4.54-$2.32)*420.9 million)/ 420.9 million] = ...
This solution assists in calculating forward P/E, growth rate, dividend payout ratio, and the target price.