Kimberly Clark stock (NYSE: KMB) is down 3% since the beginning of this year, but at the current price of around $133 per share, we believe that KMB stock has around 15% potential downside.
Why is that? Our belief stems from the fact that KMB stock is still up almost 20% from the low seen in March. Further, after posting mixed Q3 ’20 numbers despite an apparent increased need for hygiene products, it’s clear that KMB did not benefit as much from the pandemic, as other consumer product companies. Our dashboard Buy Or Sell Kimberly Clark Stock? provides the key numbers behind our thinking, and we explain more below.
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KMB stock’s rise since late 2018 came despite roughly unchanged revenues. A drop in pulp prices in 2H 2019 meant that COGS came in lower and gross margins rose from 30.3% in 2018 to 32.7% in 2019. Further, the effective tax rate dropped from 26% to 21.7% over the same period, and these factors led to a 52% rise in net income. As a result, EPS rose from $4.05 to $6.28 over the same period.
Kimberly Clark’s P/E (price-to-earnings) ratio dropped from 28x in 2018 to 22x in 2019, due to lower investor expectations as a result of the surge in pulp prices in late 2018. However, pulp prices dropped in the latter half of 2019, but due to the pandemic, KMB’s P/E multiple still hovers just under 22x. However, given Kimberly Clark’s mixed performance in Q3 ’20, there is further possible downside risk for KMB’s multiple.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus, has meant that the need for personal hygiene products is at an all-time high, and tissues and wet wipes are something one definitely carries when stepping out of the house. This benefited KMB in Q2 ’20 (quarter ending June), where revenue came in at $4.68 billion vs $4.64 for the same period last year. EPS, too, surged to $2.00 from $1.41 as gross margins came in at 38.5%, up from 32.3% in Q2 2019.
However, the increased demand for tissues and tissue products has led to upward pressure on pulp prices, with the Pulp Producer Index rising 5% between March and May 2020. This led to a drop in KMB’s Q3 ’20 EPS (announced earlier this month), as gross margins dropped back down to 34%. Despite marginal YoY revenue growth, EPS in Q3 ’20 came in at $1.38, down significantly from $1.95 for the same period last year.
We expect KMB’s business to struggle in the near-term due to fluctuations in pulp prices, and if the company is not able to manage other operating expenses efficiently, we believe the stock will see its P/E multiple decline further from the current level of 22x to around 19x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $115, a downside of almost 15% from the current price of $133.
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