Kimberly-Clark on Track to Spin-Off Healthcare Business - Analyst Blog

Consumer products giant Kimberly-Clark Corporation (KMB) remains concerned over decelerated sales growth in its healthcare segment since the last few quarters. The segment operates on low margins, thus affecting other segments too.

Therefore, the company decided to shed its healthcare business in Nov 2013 to focus on its core consumer and professional brands, optimize its performance and offer flexibility to pursue its own value-creation opportunities. (Read: Kimberly-Clark Files for Planned Spin-Off).

Recently, the company updated on the spin-off, stating that the process is likely to close on Oct 31, 2014. The healthcare business will become a separate publicly traded company named Halyard Health, Inc. with about $1.7 billion in annual sales, and will be headquartered in Alpharetta, GA, near Atlanta. Halyard Health is expected to trade on the New York Stock Exchange from Nov 3 under the symbol "HYH."

The spin-off will involve a tax-free distribution of 100% of Halyard Health's common stock to Kimberly-Clark shareholders. Accordingly, Kimberly-Clark shareholders will receive one share of Halyard Health common stock for every eight shares of Kimberly-Clark common stock held as on Oct 23, 2014, which is the record date for the spin-off. In addition, Kimberly-Clark shareholders will receive cash for any fractional shares.

Prior to the spin off, Kimberly-Clark is likely to receive a cash distribution from Halyard Health, which will be utilized to repurchase shares. Kimberly-Clark has thus raised its share repurchase target to $2 billion for 2014, up from its previous plan of $1.3–$1.5 billion.

After the spin-off, Halyard Health will be able to capitalize its position in several key categories to boost its operations and set new growth targets. It already has a market leading position in both surgical and infection prevention products and medical devices. Robert Abernathy – the president of Kimberly-Clark's Europe group – will become the CEO of the new healthcare company.

Kimberly-Clark will now be able to increase focus on its consumer and K-C Professional segments. Trimming down its underperforming operations would also boost the stock price of Kimberly-Clark.

Overall, we appreciate the company's improved organic sales growth, regular innovations, growth initiatives and a strong international presence that make the stock attractive. However, lower consumer spending pattern due to an adverse macro-economic environment, unfavorable currency and higher input costs remain headwinds for the company. In fact, it expects higher input costs in the year 2014, which may hurt margins.

Kimberly-Clark holds a Zacks Rank #4 (Sell).

Better-ranked stocks in the consumer staples sector include Pinnacle Foods Inc. (PF), McCormick & Company, Inc. (MKC) and Treehouse Foods, Inc. (THS), each carrying a Zacks Rank #2 (Buy).