Here’s Why Kimberly-Clark’s High PE Ratio is Justified

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KMB: Kimberly-Clark logo
KMB
Kimberly-Clark

Leading tissue products manufacturer Kimberly-Clark (NYSE:KMB) currently has a trailing twelve month PE ratio of 73x, which is around 3 times that of its rivals, Procter & Gamble (NYSE:PG), Unilever (NYSE:UL) and Colgate-Palmolive (NYSE:CL). It is also over 2 times the market cap weighted average PE ratio of all personal product companies listed on the NYSE, which is 31x. [1] Superficially, it would appear that Kimberly-Clark is currently heavily overpriced compared relative to its peers.

However, we believe that the premium placed on Kimberly-Clark’s valuation is justified because it has been able to demonstrate sustained organic revenue growth as well as significant margin expansion even in the current poor macroeconomic scenario. The same cannot be said for most of its peers. Combined with a strong share repurchase and dividend growth track record, we believe that Kimberly-Clark’s high valuation is fully warranted.

Our price estimate of $118 for Kimberly-Clark is nearly the same as its current market price.

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See our complete analysis for Kimberly-Clark here

Kimberly-Clark’s Climbing Share Price is Defying Ongoing Trends

Before we dive into the reasons behind Kimberly-Clark’s high valuation, let us take a look at the share price trends of the aforementioned four companies over the last 12 months.

KMB Comparative Share Price

Source: Reuters

Clearly, Kimberly-Clark is the only company whose shares have gained meaningfully in the last 12 months. Colgate-Palmolive’s shares have gained just under 5%, while shares of Unilever and Procter & Gamble have declined. We believe that even as prices of larger competitors like Unilever and Procter & Gamble have fallen, Kimberly-Clark’s shares have gained due to its success in tackling currency headwinds.

How is Kimberly-Clark Beating Its Larger Rivals?

Since the beginning of calendar 2014, the performance of all major global conglomerates based out of the U.S. has suffered due to a strong dollar and weakness in most major other currencies. The significant currency headwinds have taken a toll on the companies’ revenues as well as eroded profit margins. Most companies, notably Procter & Gamble, have resorted to sharp increase in prices to claw back the profits lost to adverse currency movements. Such heavy reliance on price hikes has resulted in a slump in volume growth as consumers have been forced to switch to lower-priced alternatives. (Read: P&G’s Near-Term Outlook Darkens as Volumes Drop in Q4)

On the other hand, Kimberly-Clark has shrewdly maintained a fine balance between raising prices and maintaining volume growth. In fiscal 2015, it expects to benefit from commodity cost deflation in emerging markets. Instead of passing on most of this benefit to its customers in the form of lower prices as it used to do in the past, the company has opted to retain and reinvest a higher level of the savings to offset the disastrous impact of currency headwinds. This strategy has allowed Kimberly-Clark to restrict price hikes to a minimal level, thereby retaining its customers’ loyalty as well as achieving meaningful volume growth. (Read: Currency Headwinds Drag Down Kimberly-Clark’s Revenues As FORCE Continues to Generate Outsized Savings)

Simultaneously, Kimberly-Clark’s has been heavily focused on improving its bottom-line through the FORCE (Focused On Reducing Costs Everywhere) cost saving program. The company exceeded its own expectations of the quantum of cost savings from the program in the first two quarters of fiscal 2015, allowing it to raise the full year cost savings guidance to $350 million. Consequently, the combination of reinvested savings from input cost deflation and operational savings through the FORCE program has allowed Kimberly-Clark to protect its margins, even as its rivals struggle to achieve the same through price hikes.

Focus on Value Accretion for Shareholders

Like the dividend aristocrats Procter & Gamble and Unilever, Kimberly-Clark also has a strong track record of consistently raising its dividends. It has raised dividends for 43 consecutive years and has a robust share repurchase program. In fiscal 2015, it expects to return at least $2 billion to shareholders in the form of dividends and share buybacks, which is equal to almost 5% of the company’s current market capitalization. [2] In fact, over the five years from 2010 to 2014, Kimberly-Clark has returned nearly $6.5 billion to shareholders through share repurchases alone.

This implies that Kimberly-Clark is focused on returning excess cash to shareholders and increasing the value for the remaining shareholders in the process. The combination of a strong focus on volume expansion, margin accretion, dividend growth and share repurchases make Kimberly-Clark an attractive investment option, thus justifying its seemingly high valuation. We note, too, that on other metrics, the valuation of Kimberly Clark shares is less is less out of line. It trades at roughly 2.1x Market Cap to Revenue and 2.5x Enterprise Value to Revenues.

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Notes:
  1. Reuters []
  2. Kimberly-Clark Fiscal 2015 First Quarter Earnings Call Transcript, Seeking Alpha, April 21, 2015 []