Kimberly-Clark Corp. (NYSE: KMB). Kimberly-Clark’s growth initiatives include improving its core businesses in developed markets, accelerating sales of Personal Care products in emerging markets, and improving its e-commerce business. KMB is using cost savings from its FORCE plan and Global Restructuring program to reinvest in its businesses. The 3% dividend yield is one of the highest among large-cap Consumer Staples companies. Our long-term rating is also BUY, as we expect KMB to benefit over time from favorable demographic trends and rising disposable incomes in emerging markets.
On October 22, Kimberly-Clark reported 3Q20 net revenue of $4.68 billion. Revenue came in above the consensus forecast of $4.60 billion. Organic revenue rose 3%, driven by higher prices, higher volume, and a more favorable product mix. Foreign exchange was a 200-basis-point headwind. In the Personal Care segment revenue rose 1%, to $2.3 billion, driven by a 4% increase in volume and 1% more favorable product mix, largely offset by a 400-basis-point currency headwind. Consumer Tissue revenue increased 9% to $1.60 billion, as a 10% increase in volume and a slight improvement in pricing outweighed a foreign exchange headwind and less favorable product mx. In K-C Professional (KCP), sales fell 16%, to $700 million, driven by a 21% decline in volume, partly offset by a 3% increase in pricing and a 3% improvement in the product mix. Foreign exchange headwinds reduced KCP revenue slightly. The adjusted gross margin rose 50 basis points to 36.2%, while the adjusted operating margin fell to 17.2% from 18.5%. Consensus estimates had called for gross and operating margins of 37.1% and 18.0%, respectively. Savings from the company’s FORCE cost-reduction program lowered costs by $125 million.
Adjusted EPS fell to $1.72 from $1.84.
While adjusted operating earnings rose 4% to $6.89 per share. The company’s guidance had called for EPS of $6.75-$6.90. Reflecting higher prices and an improved product mix, offset in part by lower volume, organic revenue rose 3%.
FINANCIAL STRENGTH & DIVIDEND
Long-term debt totaled $7.9 billion, up by $1.7 billion. Shareholders’ equity was $577 million, up from $194 million.
Third-quarter inventories declined by $3 million to $1.79 billion, reflecting the company’s efforts to curtail production in some regions while preparing for expansion in others.
In April 2020, Kimberly-Clark raised its quarterly dividend by 3.9% to $1.07 per share.
Kimberly-Clark could be walking a fine line as it tries to pass through price increases during a period of declining consumer demand. Products such as diapers and bathroom supplies are thought to be largely inelastic, but we are concerned that volumes could decline as prices are raised. Higher raw material costs have made these price hikes necessary, but management says that it is seeing signs of consumer resistance, such as shifting to private-label products. In addition, declining birth rates in developed countries could hurt demand for diapers, as seen in the decision to exit the diaper business in Europe.
Kimberly-Clark, as a multinational corporation, faces substantial commodity and currency risk. The company’s profitability is highly dependent on the prevailing cost of wood, pulp, and petroleum-based inputs, which tend to move inversely with the value of the dollar.
KMB manufactures a variety of consumer products, primarily derived from synthetic and natural fibers. It is organized into three business segments: Personal Care, Consumer Tissue, and K-C Professional. Its leading brands include Huggies, Kleenex, Kotex, Depend, and Scott.
On October 21, KMB shares fell as investors appeared disappointed by the company’s third-quarter operating margins and earnings. We think that KMB is undervalued at 18.2-times. In our view, the current share price inadequately reflects KMB’s new product development efforts, undervalued international businesses, and strong growth prospects in emerging markets. As such, we are reiterating our BUY rating and target price of $170.
On October 23, BUY-rated KMB closed at $136.88, down $1.21.