On December 30, 2013, Zacks reaffirmed its neutral rating for Kimberly-Clark Corporation (KMB). The main reasons behind this rating were the company's Q3 earnings which beat Zacks' consensus estimate, organic sales growth and cost savings to come from the organization's restructuring. The ongoing restructuring program includes the divestiture from less profitable geographic regions such as the closure of 5 facilities in Europe and the spinning-off of the health care segment. The tables below showcase these moves as beneficial for the company.
Source: KMB 10K Filing
From the table above it is clear that Europe contributed around 14-15% to the total sales of the company from FY 2010-2012. North America, which includes United States and Canada, is the main revenue driving region for the company and contributed more than 50% of the company's total net sales. The second largest contributor is the Asia, Latin America and other region which generated 35.2% of the company's net sales in FY 2012. In terms of net sales growth, net sales from Europe declined the most (-4.5%) in 2012 compared to the previous year. These reasons support the company's decision to reduce its facilities in Europe.
Now, I will analyze the company's decision to spin off its health care segment. The reason provided by the company was that the segment was not very profitable. The following table shows the single digit contribution of the health care segment to the company's operating profit while the other segments made a double-digit contribution from 2010-Q3 2013.
Source: KMB 10K and 10Q Filing
So, the figures above numerically justify the company's upcoming strategies in the coming years.
Despite the expected favorable outcomes of these moves what is preventing Zacks from allocating a straight buy rating to the company's stock are the effects of the rise in input costs and macroeconomic headwinds. Generally, the company has not used derivatives to manage the risks related to input prices. So, the fluctuation in input prices imposes a direct impact on the company's financial figures. Major factors that are a cause for concern with regards to macroeconomic headwinds include lower consumer spending patterns stemming from an unfavourable macroeconomic environment and adverse currency.
The effect of these factors can be seen over the past years in the tables below. The impact of consumer spending and macroeconomic headwinds can be seen through the volume growth and net price contributions to the company's sales growth. The effect of currency movements on the company's net sales have been stated separately in the tables below.
Source: KMB 10K Filing
Source: KMB 10K Filing
From the tables above you can see that the currency imposed positive effects on the company's net sales in 2011 compared to 2010. However, in 2012 the devaluation of the USD against other currencies, due to the federal government's quantitative easing program, negatively impacted the company's overall sales revenue. The company also reported negative effects of currency on the company's financial performance in 2013 up until Q3.
With this in mind I will analyze the forecasts of these factors for the coming years. This will tell whether or not these facts will remain a hindrance to the company's investment ranking in the near future.
I will now proceed with an explanation of the company's core raw materials and the company's future outlook.
Raw Materials and Prices
Two of the major inputs for the company are pulp and petroleum-based materials. While two important raw materials include cellulose fiber and polypropylene. Details regarding these inputs are discussed below.
Cellulose fiber is a form of craft pulp and is the primary raw material for the company's tissue products as well as a component of its disposable diapers.
Cellulosic fiber production is expected to continue to grow in the coming years. Uncertainty in the cotton market will be driving this growth. Cellulose fiber production around the globe grew by 12.0% in 2012 compared to a 3.7% rise in its demand in the same year. Moving forward, the global cellulose fiber capacity is forecasted to increase by 13.7% between March 2013 and December 2014. So according to the supply and demand trend prices for this input are likely to remain low in the coming years.
Polypropylene and Other Synthetic and Chemicals
These are petroleum-based products and are the primary raw materials for manufacturing the company's non-woven fabrics to be used in disposable diapers and other products.
Volatility in the price of polypropylene is expected up until 2015 as the industry waits for new propylene monomer capacity to come on-stream. Growth in the demand for polypropylene in North America is expected to remain low and the production capacity will be enhanced to export more of the product by 2017. The North American polypropylene field is also anticipated to benefit from propylene monomer manufactured through propane dehydrogenation (PDH) or "on-purpose" propylene manufacture. The Asian polypropylene market, led by Chinese Polypropylene production, forms the second largest zone where the company has facilities and this is shown in the table below. If the company buys these materials locally the Chinese polypropylene field is predicted to encounter overcapacity between 2012 and 2017. Overall the company will be able to benefit from the decline in prices of polypropylene over the coming years driven by higher supply and low demand.
Overall Petroleum Prices Forecast
Thanks to the extensive U.S. oil supply growth and positive possibilities for Libyan and Iranian crude oil exports a bearish situation has been predicted for global crude oil markets next year. The Deutsche Bank has recently cut its 2014 crude price forecasts against the prices in 2013. Global refiners would need to close around 2 million barrels/day of refining capacity, or 2% of the world's total, in the next two years to create equilibrium in the market. The chart below shows the World Bank's crude oil price forecast for the coming years. A decrease in nominal and real USD price per barrel is shown for future years.
Now let us discuss the macroeconomic headwinds that may not remain headwinds for the company during the near term as improvement in the economy has been forecasted. The US is the major contributor to the company's revenue. so I will proceed with discussing the forecasts for the US economy followed by Asia and Latin America.
US Economy and Currency
Some of the economic indicators relevant to the company's performance and their forecasts for the US are stated in the table below.
The table above shows the improved consumer confidence in 2014 and 2015 compared to 2013. Retail sales will also improve.. Increases in consumer spending and disposable income in 2014 and 2015 will also support a favorable economy and will boost the financial performance of the company. The economic indicators will reflect the improved economic conditions in the coming periods and this will support the federal government's decision to taper its asset purchase program. Ultimately, this will strengthen the USD and adverse currency effects on the company will reduce.
Asia and Latin America
As per PwC's forecast, FMCG companies like Kimberly Clark will continue to earn profits from improved demand in Asia. The table above shows retail sales growth in Asia and Australasia which has increased from its levels in 2013. A similar pattern of growth in real GDP and retail sales of Latin America has also been stated in the table above.
So an overall improvement in economic conditions for the company's major markets has been forecasted for the coming years. This will reduce the company's concern for macroeconomic headwinds over the coming years.
After completing a general overview through my analysis above Zacks' concerns for input costs and macroeconomic headwinds for Kimberley Clark may be resolved in the years to come. The outlook for both the pulp and petroleum based raw materials is favorable for the company. Macroeconomic headwinds in the company's major markets will also cool down in the years to come as recovery is forecasted. Therefore, I offer a buy rating despite the company's current neutral ranking.