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Kimberly-Clark to Shed Healthcare Biz

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The board of directors of Kimberly-Clark Corporation (KMB) has proposed a spin-off of its healthcare business in order to focus on its consumer and professional brands. The spinoff is expected to be completed at the end of the third quarter of 2014 and is yet to get regulatory approval. Morgan Stanley (MS) will become the advisor for Kimberly-Clark on the deal.

Post spin-off, the healthcare business will become a separate publicly traded company with about $1.6 billion in annual sales. 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.

Lately, the company’s healthcare business has been witnessing decelerated sales growth, thus raising concerns for this consumer products giant. This could be due to the fact that more and more consumers were opting for high deductible, consumer directed healthcare plans or alternate therapies before surgery, which in turn impacted the business.

Moreover, Kimberly-Clark increased the prices of disposable exam gloves after synthetic nitro prices shot up last year. The pricing action resulted in slowdown in volumes. The company believes that this decision to spin-off would allow its healthcare business to optimize its performance and offer flexibility to pursue its own value-creation opportunities. Trimming down its operations would also boost the stock price of Kimberly-Clark.

In October, Kimberly-Clark, the maker of Kleenex tissues and Huggies diapers, posted healthy third quarter 2013 results, beating the Zacks Consensus Estimate on both counts. Kimberly-Clark also increased the lower end of its previously provided earnings guidance for 2013, signaling growth potential.

Overall, we remain impressed with the company’s restructuring and cost savings program, which has increased profitability. In addition, the company’s efforts to streamline the European facilities by dissolving the diaper segment of Western and Central Europe is expected to optimize resources. Further, regular innovations, the company’s growth initiatives and its strong international presence make the stock attractive. Kimberly-Clark holds a Zacks Rank #2 (Buy).

Other stocks in the consumer staples sector that are better-positioned are WD 40 Co. (WDFC) and Pinnacle Foods Inc. (PF). Both of them carrying a Zacks Rank #2 (Buy).

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