Here’s Why Kimberly-Clark Stock Is Not Your Best Household Products Bet

We think that Colgate-Palmolive (NYSE:CL) currently is a better pick compared to Kimberly-Clark (NYSE:KMB). CL stock trades at just under 4x trailing revenues, more than KMB’s 2.3x multiple. Does this gap in the companies’ valuations make sense? We believe it does, and we only expect it to increase further. While both companies have seen a steady rise in revenues since the lockdowns started being lifted, Colgate-Palmolive’s revenues have grown much faster over the past five fiscal years, while Kimberly-Clark has seen roughly flat sales numbers. Colgate’s revenues have grown consistently YoY from $15.2 billion in FY ’16 to $16.5 billion in FY ’20, with LTM revenues currently standing at $17.3 billion. In comparison, KMB’s revenue growth has been inconsistent, with revenues from FY ’16 to FY ’19 coming in at just under $18.5 billion. The pandemic saw a rise in demand for Kimberly-Clark’s hygiene products, taking revenues to $19.1 billion in FY ’20. On an LTM basis, Kimberly-Clark’s revenues stand at $19.3 billion. Additionally, CL’s EBIT margins stand at 21.1%, higher than KMB’s 14.5%.

Having said that, there is more to the comparison, which makes Colgate-Palmolive a better bet than Kimberly-Clark, 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, along with the financial position. Our dashboard Kimberly-Clark vs Colgate-Palmolive: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Colgate-Palmolive Is The Clear Winner On Revenue Growth

Colgate-Palmolive has seen a compounded revenue growth of 2.1% over the last three fiscal years, compared to a 1.4% compounded growth in Kimberly-Clark’s revenues over the same period. However, for the most recent quarter (Q3 ’21) both companies saw roughly similar YoY growth, and both companies’ LTM revenues stand roughly at the same level.

Despite this, Colgate-Palmolive’s revenue growth of 1.5x more than Kimberly-Clark’s over the past three years, makes it the winner of sales growth.

2. EBIT margins: A Mixed Bag

Colgate’s operating margins stand at 21.1% on an LTM basis, higher than Kimberly-Clark’s 14.5%. Kimberly-Clark’s EBIT margins first dropped from 18.6% in FY ’16 to 11.5% in FY ’18, due to rising pulp prices. Margins recovered over the next two years, to around 17.1% in FY ’20, but on an LTM basis have dropped back down to 14.5%.

In comparison, Colgate has seen a steady drop in margins, from 24.6% in FY ’16 to 21.1% on an LTM basis, largely due to increasing competition in emerging markets, and foreign currency headwinds.

Both companies have seen dwindling margins over recent years, but again, Colgate’s margins stand at 1.5x that of Kimberly-Clark’s on an LTM basis.

3. Colgate-Palmolive Is In A Better Net Cash Position

Colgate’s debt-to-equity ratio currently stands at 11.9%, compared to Kimberly-Clark’s current debt-to-equity ratio that stands at almost 20%. Additionally, Colgate’s cash as a % of assets, stands at 6%, much higher than Kimberly-Clark’s 1.6%. Clearly, Colgate-Palmolive has a much better cash cushion compared to Kimberly-Clark.

The Net of It All

Colgate’s revenues have grown faster than that of Kimberly-Clark, and while both companies have seen struggling EBIT margins over the years, Colgate’s higher EBIT margins and stronger cash cushion make it a safer bet. Despite Colgate’s P/S ratio of 3.7x, compared to Kimberly-Clark’s 2.3x, we believe that this gap is set to widen. Additionally, on a P/EBIT and P/E basis, both companies stand around the same level. Given that Colgate has seen stronger revenue growth lately and has a much better cash cushion, we believe this gap is set to widen. As such, we believe that Colgate-Palmolive stock is currently a better bet compared to Kimberly-Clark stock.

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