These Scenarios Could Push Our Valuation of Kimberly-Clark Below the $100 Mark

-4.76%
Downside
129
Market
123
Trefis
KMB: Kimberly-Clark logo
KMB
Kimberly-Clark

Kimberly-Clark (NYSE: KMB) is the world’s leading manufacturer of tissue products. Apart from the renowned Kleenex and Scott tissue brands, it also manufactures popular baby care brands like Huggies and feminine care brands like Kotex. Kimberly-Clark reported revenues of $20 billion in calendar 2014, of which the consumer tissue division had the highest revenue share of 34%. This was followed by the baby care division with 26% revenue share, feminine care with 23%, and away-from-home use tissue products (“K-C Professional”) with the remaining 17% revenue share. The company currently has a market capitalization of $39 billion, having fallen 10% from the 52-week high of $119.01 which it touched in January.

Kimberly-Clark is currently facing increasing competition from global personal care behemoths Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL). The competition in the personal care industry is at an all-time high due to the ongoing long-term strategic initiatives by market leaders P&G and Unilever (Read: Are P&G And Unilever Headed In Opposite Directions?). Kimberly-Clark is also beleaguered by soaring commodity cost inflation, which dragged down its EBITDA margin by 2.2 percentage points, to 19%, in 2014.

We believe that these two factors, that is, the threat of market share losses due to increasing competition and lower profit margins due to commodity cost inflation, could potentially have a significant impact on Kimberly-Clark’s valuation. In this report, we explore the valuation impact on the company if these scenarios come to fruition.

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We have a price estimate of $111 for Kimberly-Clark, which is slightly higher than its current market price.

See our complete analysis for Kimberly-Clark here

Loss of Market Share Due to Increasing Competition

Kimberly-Clark’s biggest competitors and the leaders in the global consumer processed goods industry, Procter & Gamble and Unilever, are currently consolidating their positions in the personal care segment. P&G is aiming to achieve this by divesting under-performing brands regardless of their size and product category (Read: P&G Reports Moderate Q3 Results, Lays Out Future Growth Strategy). However, so far it has not made any divestments in the baby care, feminine care and tissue products segments.

On the other hand, Unilever is pursuing an aggressive acquisition strategy in the premium personal care segment (Read: Unilever: Key Trends to Watch in 2015). Given that Unilever’s focus is on the premium segment, its acquisitions are unlikely to include mass category products like tissues. However, it is possible that it may consolidate its position in the baby care and feminine care categories.

The strategies adopted by Procter & Gamble and Unilever are bound to result in an increase in competition in the global personal care market. P&G and Unilever far outmatch Kimberly-Clark in terms of size, revenues, geographical footprint and marketing power. Consequently, their increased focus on the personal care sector could eat into Kimberly-Clark’s market share.

In light of the above, we currently forecast a slight decline in the medium term in three of Kimberly-Clark’s divisions. P&G and Unilever have minimal presence in the away-from-home tissue products category, and therefore their strategies are unlikely to affect Kimberly-Clark’s market share in this division. On the other hand, Kimberly-Clark’s market share in the baby care, feminine care and consumer tissue products markets could take a toll if P&G and Unilever accelerate their investments therein at a higher than expected rate.

Maket Share Comparison

Additionally, Kimberly-Clark’s lower sales in the aforementioned downside scenario are likely to reduce its requirement for capacity expansion. If the company’s sales are lower than expected, it is likely to pull back on expansion plans and R&D investments, resulting in lower capital expenditure than expected. Currently, we estimate Kimberly-Clark’s capital expenditure as a percentage of EBITDA to decline from 28% in 2014 to 23% by 2019. However, if the company’s market shares fall as per our downside scenario forecasts, we estimate that its capital expenditure as a percentage of EBITDA could fall to 20% by 2019.

In such a case, the loss of market share, accompanied by the offsetting effect of lower capital expenditure, could result in a 15% downside to our current valuation of Kimberly-Clark.

Lower Margins Due to Commodity Cost Inflation

Kimberly-Clark’s profit margins have taken a beating from rising commodity costs over the last few years. Its company-wide EBITDA margin has contracted from a high of 24% in 2009 to 19% in 2014. The decline in margins is partially attributed to adverse foreign currency movements, especially in 2014. However, the situation has been exacerbated by an incessant rise in input costs (Read: Kimberly-Clark’s Push For Alternative Raw Materials Kills Two Birds With One Stone). For instance, the prices of wood pulp, which is a primary component in manufacturing tissue products, touched a 3-decade high in 2011. Its price has declined slightly since then, but is expected to expand again at an annual rate of 2.1% over the medium term. [1]

Price-of-wood-pulp

Kimberly-Clark has offset the rising input costs by passing on the impact to consumers through higher selling prices as well as indirect, under-the-radar measures like “de-sheeting”. [2]. These measures, coupled with robust cost savings from the FORCE cost saving program, have helped the company protect its non-GAAP margins to a certain extent (Read: Kimberly-Clark Posts Strong Volume Growth and Margin Expansion in Q1). Kimberly-Clark has also undertaken long term measures like reducing the reliance on natural forest products in favor of alternative low-cost raw materials. We believe that over the long term, these strategies may help the company achieve a slight expansion in its profit margins.

EBITDA Margin Comparison

However, inflationary conditions in emerging markets, sustained currency headwinds and increased import costs may cause a significant uptick in commodity costs. Such an unexpected level expansion in prices of input costs could exert substantial pressure on Kimberly-Clark’s margins. Consequently, we estimate that over the medium term, the aforementioned benefits could be wiped out by the higher commodity costs, resulting in nearly stable margins rather than improvement thereon. This could result in a 20% downside to our current valuation of the company.

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Notes:
  1. Wood Pulp and Paper Prices on the Rise, IBIS World, January 14, 2015 []
  2. Toilet-Tissue ‘Desheeting’ Shrinks Rolls, Plumps Margins, The Wall Street Journal, July 24, 2013 []