Earnings Cheat Sheet: Is Kimberly-Clark a Victim of Inflation?

By Eric McWhinnie

Kimberly-Clark Corporation (NYSE:KMB) released third quarter results on Tuesday. The company manufactures personal care goods such as Kleenex, Cottonelle, and even Huggies. Founded in 1872, Kimberly-Clark is generally viewed by the investor world as a stable recession proof company, which also happens to pay a healthy 4% dividend. Today, many investors questioned that belief as shares fell almost 6% after its earnings release.

Earnings: KMB reported a 19% drop due to higher commodity prices. The company earned $469 million ($1.14 per share) in the third quarter, compared to $582 million ($1.40 per share) in the year ago period.

Revenue: Overall, the company reported a revenue increase of 1% to $5 billion. However, the KMB unit that sells to US businesses saw a decrease of 3% in revenue. In its Europe business unit, revenue saw a 12% decrease, 8% was accredited to exchange rate fluctuations.

Actual versus Wall Street Expectations: Earnings of $1.14 per share fell below the average analyst estimate of $1.28. Furthermore, Kimberly-Clark reduced its full year guidance. The company now expects $4.60 to $4.70 earnings per share for the year. This is a decrease compared to its earlier estimate of $4.80 to $5 per share.

Notable Stats: Costs for materials used in the company’s products continue to rise. Cost for items such as pulp and oil-based materials rose by $265 million in the third quarter. This is a record increase for Kimberly Clark.

Did You Hear That? CEO Thomas Falk said, ”Given our new sales and cost inflation assumptions, we’ve updated our outlook for 2010 adjusted earnings per share accordingly. While the difficult environment has dampened our earnings growth this year, we are committed to improved performance going forward. We expect earnings per share in the fourth quarter will be similar to, or potentially somewhat higher than, third quarter performance. We anticipate benefits from improved net realized revenue, additional cost savings and somewhat lower pulp costs compared to third quarter levels. At the same time, we are closely monitoring the overall economic environment, particularly market demand in North America. We will continue to successfully execute our strategies to improve shareholder value over time.”

Commentary: Kimberly-Clark and investors are clearly concerned about inflation. Although Kimberly-Clark may be able to pass some costs on to consumers, consumers may be more inclined to purchase generic brands as their own cost saving method. The stable and reliable dividend from Kimberly-Clark is nice, but may fail to net investors a profit after inflation is considered.

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Disclosure: No positions.