Kimberly-Clark’s (NYSE:KMB) stock has risen by around 15% this year, from a price of $73 in January to almost $83 today, and reaching a record high of $88 in late July. This is in spite of a dividend increase of almost 6% earlier this year.
The company has a number of strengths such as strong fundamentals, a portfolio of well-known brand names, a relatively recession proof business, reasonably strong revenue growth, and a history of consistent dividend increases. However, it has faced one major drawback over the past decade – declining margins.
Over the last decade ending 2011, revenues have grown at CAGR of 4.6% while gross profits have grown at around 2.8%. This has translated into steadily declining margins. Recently, however, the company has managed to buck the trend and reported gross margins of 33.6% last quarter, which represents an increase of 240 basis points over the same quarter last year. A similar trend is observed in operating margins as well.
Strong Improvement in Margins through Cost-Cutting Programs
Kimberley-Clark attributes its success in turning around the declining margin trend to its cost-cutting programs FORCE (Focused on Reducing Costs Everywhere) and SCRP (Strategic Cost Reduction Plan). The programs involve a number of aggressive cost-cutting strategies, such as reducing employee salary costs (either by downsizing or renegotiating labor contracts), reducing spending, optimizing supply chains, and several other such initiatives.
The FORCE program has led to cumulative cost savings of over $1.6 billion over the past eight years, and continues to gain momentum. The company expects to save $515 million for the two years ending 2012, which exceeds its initial target of saving $400-500 million from 2011-2013.
Volatile commodity-based input costs, however, continue to threaten margin growth. In 2011, commodity cost inflation resulted in company-wide EBITDA margins falling 160 basis points, despite annual cost savings of $265 million and pricing increases of around 2-3%.
Focus on Higher Margin Divisions and Product Differentiation
The company is attempting to drive margin growth through a shift in focus toward higher margin businesses, such as Healthcare (Kimberly-Clark & Ballard Medical Disposables). The division reported margins of almost 23% in 2009, but has since declined due to litigation-related expenses. Margins for the division could rise through cost savings from higher volumes and market share growth.
It also plans to improve margins for its Consumer Tissue segment, which makes up around 48% of revenues, through product differentiation and brand strengthening. The division has historically had low margins relative to the Personal Care segment (Baby Care and Feminine Care). In spite of having higher revenues, it makes up just 43% of total value compared to Personal Care, which contributes 48%. We project margins for the division to gradually approach 19% by the end of our forecast period.
We currently have a price estimate of $86 for Kimberly-Clark, which is about 5% above the market price.