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Three analysts and top management from three sector firms examine the Cosmetics, Personal Care & Household Products sector in this special 45-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info427.htm

TWST: Will you begin by telling us about the approach that you take to investing in personal care and household products stocks?

Mr. Gingrich: I think you need to look at investment decisions on two levels. One is the overall attractiveness of the sector. There is no doubt that the earnings power of the household products group is in secular decline, which I think implies that investors need to be cautious in their exposure to the group. Near term, the group will likely hold its own given its defensive nature. However, the group is discounting 8%-9% earnings growth, and we believe 7%-8% earnings growth is the realistic number over the next four to five years. Revenue growth in the group in a neutral foreign exchange environment is only 4%, so expecting double-digit earnings growth over the long haul is simply not realistic. The long-term valuation trends in the group will be negative. The other issue to consider, of course, is the ranking of stocks within the sector. On this point, research shows that both valuation and fundamentals are important. This sector is not like technology, where “winner can take all.” Personal care and household product companies do well from an investment standpoint because they’re gaining market share at an accelerating pace or reducing cost at an accelerating pace. That is something that is heavily execution-driven, which means that it’s difficult to sustain over a multi year time frame. In fact, over the past 20 years, a stock that was a top-half performer in year one only had a 43% probability of being a top-half performer in the subsequent year. Today, I think that the best plays in the sector are some of the turnaround stories, whose valuations have been beaten down and where the companies have put the fundamentals needed in place to improve.

TWST: What’s the case for Kimberly-Clark (NYSE:KMB)?

Mr. Gingrich: The case for Kimberly-Clark is again in some ways a turnaround situation because the company stumbled in the first half of this year. The investment bet is that the company will return to double-digit growth beginning next calendar year. The case for this improvement is supported by a couple of factors. First, the company will be lapping the run-up that it had in its energy costs, particularly in the first half of the year. (I don’t think we’re going to see 10 to 12 for natural gas like we did at the end of the fourth quarter and most of the first quarter as we move into winter this year.) Second, the company is lapping the expenses that they incurred for launching Roll Wipes, which is their pre-moistened toilet paper. Third, the company is lapping the startup costs associated with two new tissue machines and the Roll Wipes machine. Finally, the company is lapping the snafu it had running out of capacity in their toilet paper business and in the European diaper business. All of those things, added together, are on the order of 75-100 million in profit improvement. In addition, fiber costs, which represent a huge piece of Kimberly-Clark’s cost structure, have declined significantly. Furthermore, resin costs are moving lower, and Kimberly-Clark is a big resin buyer as well. These factors taken together should generate double-digit growth next year. Kimberly-Clark’s market share, after the initial stumble in the middle of the second quarter, has now bounced back. And frankly, from a valuation standpoint, Kimberly-Clark, right now, has probably the most compelling valuation in the group. It sells at a big discount to the rest of these names and at a big discount to its fair value.

This special issue includes:

1) Cosmetics, Personal Care & Household Products - In an in-depth (4,700 words) Analyst Interview, William H. Steele, Managing Director at Banc of America Securities, examines the outlook for the sector and shares specific stock recommendations.

2) Personal Care & Household Products Stocks - In an in-depth (4,200 words) Analyst Interview, James A. Gingrich, Senior Research Analyst at Sanford C. Bernstein & Company, Inc., examines the outlook for the sector and shares specific stock recommendations.

3) Household Products & Personal Care - In an in-depth (4,300 words) Analyst Interview, Linda Bolton Weiser, Vice President of Equity Research at Fahnestock & Company, examines the outlook for the sector and shares specific stock recommendations.

4) The TWST confidential Off-The-Record survey of management performance at eight sector firms asked market insiders about the ability of management teams to create shareholder value.

5) CEO and Sponsored interviews (average 2,500 words). Top management of three sector firms examine the outlook for their firm and the sector.