Here Is Why We Think Kimberly-Clark Is Fairly Valued At $100

by Trefis Team
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Kimberly-Clark
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Kimberly-Clark (NYSE:KMB) has a history of increasing dividends consistently for the past 41 years in-line with its earnings growth. With the annual revenue crossing $21 billion, Kimberley-Clark owns an illustrious brand portfolio, including five brands grossing more than a billion dollar in sales a year. Although the brands are well known globally, the company has recently faced headwinds owing to heightened competition and the global economic slowdown.

We have a $100 price estimate for Kimberly-Clark, which is at par with the current market price. Kimberly-Clark competes with Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL).

See Our Full Analysis for Kimberly-Clark’s Stock

FORCE Program Driving Bottom Line

FORCE (Focus On Reducing Costs Everywhere) is the ongoing global efficiency and restructuring program undertaken by Kimberly-Clark with the aim to contain costs and keep the company on track for sustainable growth. The company reported $783 million in operating profit for the first quarter of 2013 against $700 million for the same period in 2012. However, it also recognized cost savings of $85 million for the quarter as a result of the FORCE program. [1] This is a phenomenal cost reduction but cannot continue indefinitely. If we remove the effect of the FORCE program, operating profits have been relatively flat year-on-year. Similarly for the full fiscal 2012, operating profits increased by $231 million over the previous year as the company recognized cost savings of $295 million. [2]

Lackluster Performance Of Developed Markets Offset By Growth In Developing Markets

A sustained slowdown in the developed markets has reduced the overall pace of growth for Kimberly-Clark as more than 60% of its revenues are generated from the United States, Canada and Europe. Also, the company’s decision to wind up its unprofitable businesses in Europe led to a decline of 10% in revenues from Europe last year. On the other hand, revenues from Asia and Latin America grew by about 13% year-on-year in 2012, indicating high potential for growth in these regions. We expect the company will continue to get good support from developing markets in the coming years, eventually leading to a higher contribution to overall revenues.

Increased Support From Tissue Division As Margins Recover

The personal care division (that includes Baby CareFeminine Care and Adult Incontinence products) contributes to about 48% of Kimberly-Clark’s value, compared to 44% by the consumer & professional tissues segment (Kleenex and Scott brands), even though both divisions generate similar revenues. This is in contrast to the scenario in 2011 when the tissue division contributed 10% higher revenues than the personal care division.

This was mainly due to the convergence of operating margins for both these divisions. Operating margins have declined from 58% in 2010 to 50% in 2012 for the personal care division while for the tissue division they increased from 37% to 43% over the same period. The growth in margins was primarily due to lower input costs to manufacture tissues supported by a favorable price mix. On the other hand, input costs for the personal care division rose over the same period, leading to a decline in margins.

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Notes:
  1. First Quarter Results []
  2. 10K 2012 []
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