Kimberly-Clark Earnings Preview: Watching Cost Pressures

Kimberly-Clark (NYSE:KMB), the consumer goods giant that makes items like Kleenex tissues, Huggies diapers and Kotex sanitary pads, should report Q1 earnings on April 25th. Kimberly-Clark makes paper and pulp based consumer products and competes with companies such as Procter & Gamble (NYSE:PG), Unilever (NYSE:UL) and Colgate-Palmolive (NYSE:CL) in other consumer products.

While we expect corporate restructuring programs to act as a cash drain during 2011-12, we’re certainly hoping for some improvement in the operating margins. We currently value Kimberly-Clark with a $69.80 Trefis price estimate of its stock, which is roughly a 6% premium to its current market price.

Concerned About EBITDA Margins

Kimberly-Clark closed 2010 with a 3.3% increase in sales. However, the EBITDA margin declined primarily on account of inflation in raw material costs and restructuring initiatives. These pressures very much still persist, perhaps in greater magnitude than last year. Given the inflationary environment, we expect rising raw material costs to continue putting downward pressures on gross margins.

Overhead costs will stay elevated, in part due to the Pulp & Tissue Restructuring Program that will likely incur costs to the tune of half a billion dollars in  2011-12 knocking down EBITDA margins. We wrote about this in a note titled Kimberly-Clark Shuts Pulp Business to Focus on Profitability & Core Brands.

Price Increases to Alleviate Cost Pressures

To combat cost inflation, Kimberly-Clark announced price increases in March ranging from 3% to 7% in diapers and around 7% in tissues, to be implemented in the second and third quarter of this fiscal year for its North American business^.

We look for any indications of continued price increases or additional ones to help offset costs. ^[1]

Other Areas to Watch

Restructuring programs in the past have strained Kimberly-Clark’s cash balance, and we look for signs that these initiatives will translate into greater efficiency in operations and improved EBITDA margins in the future. You can drag the graphs below to see the impact on stock price estimate.

Both baby care and feminine care make up more than 30% of our $69.80Trefis price estimate of Kimberly-Clark’s stock.

With Kimberly-Clark’s plans of raising prices in the second half of this fiscal year, we expect the management to employ more focused advertising and marketing to sustain its market share in spite of rising prices. You can drag the graphs below to see the impact on stock price estimate.

See our full analysis of Kimberly-Clark’s stock.