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Summary

  • Recent quarters remain a testament to KMB's healthy state of affairs.
  • Despite a competitive industry environment, the company is doing well to improve its cost structure and expand margins.
  • The stock offers a potential price appreciation of 5%.

Kimberly-Clark Corporation (NYSE:KMB) recently reported satisfactory 1Q2014 results. The company reported organic sales growth of 4% year-on-year in 1Q2014. Moreover, KMB boosted its earnings with effective cost control strategies like FORCE (Focused On Reducing Cost Everywhere), thereby generating 3% year-on-year growth in operating margins for 1QFY14. The company's efforts to control costs benefited the bottom-line results, as it succeeded in beating analyst EPS estimates once again by 0.70% in the recent first quarter. Also, the company has rich shareholder return polices, as it offers a solid dividend yield of 3% and undertakes attractive share repurchases. Moreover, the stock offers a potential price appreciation of 5%, based on my price target, as shown below.

With well-known brands like Kleenex and Huggies, KMB stands as one of the leading stocks in the Consumer Staples industry. The company is operating around the globe with two main segments; Consumer Tissue and Personal Care, along with Healthcare and K-C Professionals. The revenue contribution by the segments in 1QFY14 is shown in the pie chart below.

Source: Company's Quarterly Earnings Report

Financial Performance

The company experienced an organic sales growth of 4.2% year-on-year in 1Q2014. An improvement in sales was driven by higher sales volume and prices, whereas restructuring actions and currency headwinds negatively affected quarterly sales. In the highly competitive Consumer Staples industry, the recent price inflation also adversely affected the company's sales. In 1Q2014, the Consumer Tissue segment observed a 2.3% year-on-year organic sales increase and the Personal Care segment's organic sales were up 7.6% year-on-year. The following table shows total organic and the segments' organic sales growth in recent quarters.

1Q-13

1Q-14

Total Organic Sales

3.5%

4.2%

Total Organic Volume

2%

3%

Total Currency Impacts

(1%)

(3%)

Organic Sales (Personal Care)

4.3%

7.4%

Organic Volumes (Personal Care)

3%

6%

Currency Impacts (Personal Care)

(1%)

(5%)

Organic Sales (Consumer Tissue)

4.6%

2.3%

Organic Volumes (Consumer Tissue)

4%

0%

Currency Impacts (Consumer Tissue)

0%

(2%)

Source: Company's Quarterly Earnings Report

Other than organic sales growth in the recent quarter, the company reported an EPS of $1.48, in-line with consensus estimates and flat year-on-year. Earnings for the quarter were positively affected by organic sales growth and cost saving measures, partially offset by currency movements and higher input costs.

Stock Price Drivers

KMB has been effectively managing its cost structure with cost cut initiatives, like the FORCE program, in a bid to grow its operating margins and improve bottom-line results. The company's FORCE program has helped lower costs by $70 million in the recent first quarter through lean manufacturing and efficient supply chain practices. Also, the pulp and tissue restructuring measures resulted in $10 million in cost savings in the recent quarter. In addition, the company's controlled approach towards administrative expenses has helped in lowering the selling, general and administrative expenses (SG&A), as SG&A as a percentage of sales dropped by almost 100bps. The following table shows the improving operating metrics for KMB.

1Q-13

1Q-14

SG&A as Percentage of Sales

19.1%

18.1%

Operating Margins

9.9%

10.22%

Source: Calculations and Company's Quarterly Earnings Report

Other than aggressive cost-cutting measures, the company's shareholder-friendly policies remain an important stock price driver. The company currently offers a solid dividend yield of 3%. Last month, the company paid a quarterly dividend of $0.84, up from $0.81 per share, representing a 3.7% increase as compared to 2013. The recent dividend increase was the 42nd consecutive year of dividend increases. Other than the solid dividend yield, the company also spent $464 million to repurchase shares by the end of the recent first quarter. KMB repurchased $984 million worth of common stock in 2013, and is further expected to repurchase $1 billion-$1.5 billion worth of common stock in 2014. As the company continues to repurchase shares, it will magnify its ROE and boost EPS.

Price Target

I have calculated a price target of $114 for KMB. I have used cost of equity 9.3%, after-tax cost of debt: 5%, nominal growth rate: 2.5% and WACC: 6.7%. Based on my price target calculation of $114, the stock offers a price target appreciation of 5%.

2015

2016

2017

Terminal Value

FCF (In$-Millions)

2,139

2,678

2,164

52,812

Present Value of FCF (In$-Millions)

2,004

2,351

1,781

43,464

Source: Equity Watch estimates and Calculations

Total Value of Firm = $2,004 + $2,351 + $1,781 + $43,464

= $49,600

Value of Debt = $6,300

No. of Shares Outstanding = 379.4

Value of Equity = $49,600 - $6300

= $43,300

Price Target = $43,300 / 379.4

= $114

Conclusion

KMB has been delivering a healthy financial performance in recent quarters. In the competitive industry environment, the company has been doing well to improve its cost structure and expand margins. Also, the stock remains an attractive investment choice for dividend-seeking investors, as the stock offers a solid dividend yield of 3%. The company's share repurchase initiative is also likely to portend well for its ROE and EPS growth. Moreover, the stock offers a potential price appreciation of 5%, based on my price target calculations. Due to the above-mentioned factors, I am bullish on the stock.

Source: Kimberly-Clark Corporation's Immaculate Record Of Rewarding Investors Earns It A Stellar Rating