We think that Procter & Gamble Co. (NYSE:PG) currently is a better pick compared to Kimberly-Clark Corporation (NYSE:KMB). P&G stock trades at about 4.6x trailing revenues, compared to around 2.3x for Kimberly-Clark. Does this gap in the companies’ valuations make sense? We believe so. While both the companies have benefited since the pandemic, with an overall increase in demand for their products, Kimberly-Clark has started seeing a pull back in demand to pre-pandemic levels, as the frenzied hoarding of hygiene products has stopped. On the other hand, Procter & Gamble has continued with its strong revenue and EBIT growth, which reflects in its surging valuation multiples. PG’s revenues have jumped from $65.1 billion in FY’17 to $76.1 billion in FY’21 (PG’s fiscal year ends in June). Operating margins first dropped sharply from 29% in FY ’17 to 8% in FY ’19, but have since recovered strongly to 23.6% as of FY ’21. Meanwhile, KMB has seen revenue rise from $18.3 billion in FY ’17 to $19.1 billion in FY ’20, with most of the growth coming during the pandemic (revenues rose from $18.4 billion in FY’19 to $19.1 billion in FY’20). However, demand has pulled back over the last couple of quarters, and LTM revenues stand at $18.9 billion.
However, there is more to the comparison, which makes PG a better bet than KMB even at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Procter & Gamble vs Kimberly-Clark Corporation: Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Procter & Gamble Is The Clear Winner On Revenue Growth
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While Kimberly-Clark’s revenues have struggled due to unstable sales volumes and fluctuating pulp prices, Procter & Gamble has seen steady revenue growth over the past four years. Procter & Gamble’s revenues rose from $65.1 billion in FY ’17 to $76.1 billion on an LTM basis, an increase of 17%, while Kimberly-Clark has seen a growth of just 3% over this period, with revenues rising from $18.3 billion in FY ’17 to $18.9 billion on an LTM basis.
Further, Procter & Gamble is a larger company, with 4x the revenue of that of Kimberly-Clark, and a more diversified business than the latter.
2. Procter & Gamble Edges Kimberly-Clark On Margin Growth
Both companies saw a drop in margins from FY ’17 to FY ’19, with Kimberly-Clark’s margins suffering due to rising pulp prices, and Procter & Gamble seeing a sharp drop in margins from 19.8% in FY ’18 to 8% in FY ’19 due to a one-time impairment charge. However, Procter & Gamble’s margins have since recovered from 8% to 23.6%, while KMB’s EBIT margins have dropped from 16.2% to 15.3% over the same period.
3. Procter & Gamble In A Much Better Net Cash Position
PG’s debt-to-equity ratio currently stands at 9.1%, less than half that of KMB’s 20.8%. Further, PG has a better cash cushion, with cash as a % of assets standing at 8.6%, higher than KMB’s 1.7%. We believe that Procter & Gamble is at a significantly lower financial risk as compared to Kimberly-Clark.
The Net of It All
While Procter & Gamble’s revenues and margins are much larger than that of KMB, the former has also seen stronger growth in revenues and operating margins compared to KMB. Looking at the post-Covid recovery, PG has fared far better than KMB, with LTM revenues more than 12% higher than the pre-Covid fiscal year (FY 2019), while KMB’s LTM revenues stand only around 3% higher than those in FY 2019. While PG has a higher P/EBIT ratio of 25x vs KMB’s 15x, and a higher P/S ratio at 4.6x vs KMB’s 2.3x, PG has the potential to continue on its run, supported by strong financials. We think this gap in valuation could further widen over time. As such, we believe that Procter & Gamble is currently a better buying opportunity compared to Kimberly-Clark stock.