Kimberly-Clark Shuts Pulp Business to Focus on Profitability & Core Brands

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Downside
124
Market
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Trefis
KMB: Kimberly-Clark logo
KMB
Kimberly-Clark

Kimberly-Clark (NYSE:KMB), the maker of Huggies diapers, Kleenex tissues and Kotex sanitary pads recently announced its 2010 results, which generated a mixed response from analysts. While the erosion in overall EBITDA margin by over 1 percentage point raised some concerns, management appeased investors by announcing a 6% increase in dividends, a $1.5 billion stock repurchase plan and a restructuring program that involves selling off the remainder of its pulp business.

We have revised our valuation of Kimberly-Clark with a $69 Trefis price estimate of its stock, which is around 8% ahead of the current market price.

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Quick Take on 2010 Results … Firm But Cost Pressures & Growth the Main Concerns

Among positives, sales grew by $630 million, the company realized $370 million of cost savings and pension expenses decreased by $120 million, helping lift the 2010 results. On the other side, inflation in key inputs totaled about $790 million and organization restructuring initiatives of $128 million weighed on profitability in addition to $100 million in marketing, research and development expenses and a $98 million charge on account of adoption of inflationary accounting in Venezuela. With this result, the EBITDA declined from around $3.95 billion in 2009 to $3.87 billion in 2010.

Refocusing on Profitability and Core Brands

To cope with the rising fiber and oil costs, Kimberly-Clark plans to sell off or close down five to six of its manufacturing facilities that currently make about 8% of the 2.5 million tons of pulp that it uses in a year. This aims at restoring the profitability of its $6.5 billion worth (in sales) consumer tissues business, which makes items such as toilet paper, paper towels and tissues. The company expects the Pulp & Tissue Restructuring Program to be completed by the end of 2012, and it will incur costs to the tune of $500 million spread over 2011-12.

In a recent note titled Can Kimberly Clark Learn from P&G’s Recession Strategy?, we looked at how Kimberly-Clark might defend its market share in two of its largest product segments, Baby Care and Feminine Care, which constitute over 34% and 28% of its stock respectively. We highlighted that by engaging the customer better either through promotions or through lower priced strategies, it could better appeal to a broader and more price sensitive audience.

You can scroll through some of the leading drivers to our forecast in the chart above to see how these drivers impact the stock price.

You can see a detailed analysis of our $69 Trefis price estimate of Kimberly-Clark’s stock here.