Toward the end of the October 1 lightning round of Mad Money, a caller asked about Kimberly-Clark Corporation (NASDAQ:KMB) and its pending acquisition of Kenvue Inc. (NYSE:KVUE). They highlighted Kimberly-Clark’s difficult stock performance, low earnings multiple and high dividend yield. Jim Cramer replied:
Okay, so I’m going to tell you, one, I think it’s a buy. And two, when I talk about it with Jeff Marks, I feel awful. I feel I started too soon. It’s become a bond play, but I am going to buy more because I think the combination with Kenvue is unstoppable. So, I am willing to stick my neck out and say I’m not going to regret buying Kimberly-Clark in the $90s a few years from now.
Latest developments reveal that KMB is moving to clear EU hurdles.
The Acquisition Offers Savings but Also Links the Two Stocks
Under the agreement, each Kenvue Inc. share will be exchanged for $3.50 in cash and 0.14625 Kimberly-Clark shares. Kenvue’s August results release said the transaction was expected to close in the fourth quarter. Its shareholders have exposure to Kimberly-Clark’s share price as well as the deal’s completion.
The companies identified approximately $2.1 billion in annual synergies, net of reinvestment. That includes $1.9 billion in cost savings and approximately $500 million in additional profit from revenue opportunities, offset by roughly $300 million in reinvestment. These are management targets rather than savings already achieved. Both businesses reported some operational improvement. Kimberly-Clark Corporation’s second-quarter adjusted earnings per share from continuing operations rose 10.4% to $1.80. Kenvue generated organic sales growth of 1.6% and adjusted earnings per share of $0.31, up from $0.29. We recently discussed whether Kimberly-Clark can turn its Kenvue bet into $2.1 billion in savings.
Income Supports the Appeal at Kimberly-Clark
Data shows Kimberly-Clark Corporation trading at approximately 13x forward earnings, compared with 14.5x for Kenvue. Kimberly-Clark’s annual dividend of $5.12 represented a yield of approximately 5.4%. Kenvue Inc.’s earnings multiple is only part of its valuation. Because the consideration combines cash and shares, its prospective takeover value changes with Kimberly-Clark’s stock price. You can read about Cramer mentioning that “we’re going to have a new colossus.”
Integration Will Begin With Existing Operating Pressures
Kimberly-Clark Corporation reported essentially flat organic sales in the second quarter. Its margin improvement benefited partly from one-time tariff refunds, while acquisition-related charges totaled $109 million. The company was incurring deal costs before realizing the proposed combination’s savings.
Kenvue Inc. faces its own margin pressure. Adjusted gross margin declined to 60.2% from 60.9%, reflecting inflation, tariffs and unfavorable transactional currency movements, partly offset by productivity savings and pricing. The combined company must address these operating pressures while executing the integration and delivering the projected savings.
Fund Counts Fall as Kimberly-Clark’s Short Position Stands Out
According to Insider Monkey, Kenvue had 65 hedge fund holders in the second quarter, down from 70, while Kimberly-Clark declined to 53 from 59. Short interest stood at 3.48% of Kenvue’s float and 18.03% of Kimberly-Clark’s. The latter is substantial, although a stock-financed acquisition can also attract merger-related hedging, so the entire position should not automatically be read as a bearish company view. One of these stocks is one of Billionaire Glenn Dubin’s Highbridge Capital’s top 10 picks.
Cramer admitted he bought Kimberly-Clark too early, but he still likes what the Kenvue deal could mean a few years from now. The dividend gives him a reason to be patient as the companies work toward the proposed savings. Kenvue Inc. shareholders will also have a stake in how the combination performs, since most of their payment will come in Kimberly-Clark Corporation shares.
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