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Investment Overview for Kimberly-Clark (NYSE:KMB)
Huggies & Pull-Ups Baby Care
Baby Care EBITDA Margin and Feminine Care EBITDA Margin: We currently forecast Kimberly-Clark's Personal Care (Baby Care, Feminine Hygiene Care and Adult Incontinence products) EBITDA margin to marginally improve from 22.5% in 2013 to about 22.8% by the end of the Trefis forecast period. There could be a 10% upside to the Trefis price estimate if margins improved to the 2009-2010 levels of 24-25% by 2020. There could be a 3% downside if the margins continue to stay at the current levels over the forecast period.
Kimberly-Clark's Market Share of Global Baby Care Diapers: We currently forecast Kimberly-Clark's market share of baby care products to rise from 19% in 2013 to 19.7% by 2020. There could be a 2% potential downside if the market share were to decline to 18% instead over our forecast horizon.
Kimberly-Clark Corporation is one of the world's top producers of professional and consumer tissue, baby care non-wovens, female hygiene care, adult incontinence care and disposable healthcare products. The company sells its products in 150 countries and maintains manufacturing operations in 41 countries. It is one of the top 2 brands in its respective product segments in over 80 countries.
Products for household use such as consumer tissue, baby diapers, and female hygiene care are sold directly and through wholesalers to supermarkets, mass merchandisers, drug stores, warehouse clubs, and variety and department stores. Products for away-from-home use such as professional tissue and medical disposables are sold through distributors as well as sold directly to manufacturing, lodging, office building, food service, healthcare establishments and high volume public facilities. Wal-Mart, most recently, accounted for an estimated 13% of Kimberly-Clark's net sales.
Cellulose fiber, such as kraft pulp or from recycled waste paper, is the primary raw material for manufacturing tissue products. Cellulose fiber along with super absorbent material such as Polypropylene is a primary component in disposable diapers, training pants, feminine pads and incontinence care products. Most recovered paper, synthetics, pulp and recycled fiber are purchased primarily from third party suppliers.
Kimberly-Clark's most popular brands include: Huggies and Pull-Ups in Baby Care; Scott and Kleenex in Personal-Professional Tissue; Depend and Kotex in Feminine Hygiene Care.
The US markets continue to contribute over 53% to the net sales of Kimberly-Clark followed by developing markets(32% of net sales) and Western Europe (15% of net sales).
Consumer & professional tissues generate 10% more revenues but much lower profit margins than personal care
In 2010, the consumer and professional tissue (Kleenex and Scott) segments generated 10% more revenues than the personal care (baby care, feminine care and adult incontinence products) segment, but reported 20% lower EBITDA margins than the personal care division. The former reported an EBITDA margin of 18%, compared to a 24% EBITDA margin for the personal care division.
The difference narrowed in 2012 as higher input inflation in the personal care category brought down margins to 20%, while the tissues division maintained margins at around 19.5%. However, going forward, we expect input costs to ease and the personal care division to recover some of its margins.
Input inflation and pressure on margins
The company-wide EBITDA margins for Kimberly-Clark fell from 20.9% in 2010 to 19.4% in 2011, despite a 2-3% increase in selling prices and $265 million in cost savings. This was due to high input commodity inflation which increased input costs by $580 million. Nonetheless, input costs moderated over the second half of 2011 which helped second half gross margins improve by 1% compared to the first half of the year. This was the result of higher prices. In 2012, the EBITDA margins remained relatively flat at 19.5%. In 2013, margins increased to 21.5% due to cost savings and higher D&A in the year. The company has a full-year outlook of $150-$250 million in cost inflation for 2014. We expect the trend of moderation in input costs to continue
New product launches and increased spending on marketing
Kimberly-Clark plans to launch new products gradually to create different product segments under the same brand. According to company management, the firm's strategic marketing spending is planned to increase faster than sales, primarily supporting product innovations, targeted growth initiatives and overall brand equity. Research and development and selling expenses are also expected to rise faster than sales to support growth initiatives and to further improve capabilities.
Strong international growth riding on increasing consumer demand in emerging markets of Asia Pacific, Latin America
As household disposable incomes have increased, led by higher economic growth in emerging economies, there has been a rapid increase in demand for consumer goods such as baby diapers and female hygiene care. Trefis expects this increasing consumer demand in the relatively unsaturated Asian and Latin American markets, combined with the strong market position of Kimberly-Clark's current brands, will result in significant value addition.
Growth in countries such as China also carries with it some inherent risks. For one, the company’s pricing structure will have to be revised significantly to suit the wallets of third-world consumers. The company will also have to step up its general advertising spend in order to attract new customers. The increase in marketing spend for the company stood at about $115 million for 2012, a double-digit increase from previous year. Meanwhile, growth in emerging economies also exposes Kimberly-Clark to currency risks given the volatility relative to the dollar and euro. Kimberly-Clark’s investments in these regions certainly paid rich dividends over the past year as organic sales from the company’s international operations were 10% higher and operating profit higher by double-digits. Diapers, in particular, offered some spectacular figures as volume sales grew by 45% in China, 20% in Russia and 15% in Brazil.
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Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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