Kimberly-Clark Corporation (NYSE:KMB), one of the leading consumer products companies, has performed very well in the last year and made some decent returns to investors. In the last twelve months the stock has climbed a decent 11%. Kimberly-Clark is currently trading at $108.08 which is lower than its 52-week high price of $114.45 but above its 52-week low price of $91.44. Up until mid-July, Kimberly-Clark outperformed the S&P 500 and its competitors. However, the stock slipped when it reported disappointing results for the second quarter of 2014 at the end of July. Due to this slip Kimberly-Clark's total return in the last year went up 15.26%, while in comparison Proctor & Gamble's (NYSE:PG) total return went up just 4.06% and Colgate-Palmolive's (NYSE:CL) total return went up only 8.10%. There may be further upside potential and this dip creates a buying opportunity.
Kimberly-Clark Expects Competition to Increase
Kimberly-Clark's performance improved due to decent organic growth but it reported lower than expected earnings results. The slow growth urged the company to cut its outlook for the full year primarily due to the challenging economic environment and the anticipated increase in competition.
The adult dipper industry is growing faster than toothpaste, tissues, and other products in the household products industry. Kimberly-Clark is facing intense competition from its rival Proctor & Gamble. Procter & Gamble has decided to launch incontinence products in the coming months and this may impact Kimberly-Clark's adult segment earnings. Proctor & Gamble may be making the right move. However, it is struggling to post higher sales across its businesses, which has brought the company under pressure. Kimberly-Clark may have an edge because Proctor & Gamble is re-entering this segment after quitting few years ago. In anticipation of the increasing competition, Kimberly-Clark has cut-down its outlook for fiscal year 2014. Citing a more difficult environment, it cut the top end of its full-year adjusted earnings view by five cents per share to a range of $6 to $6.15.
Is Kimberly-Clark Growing Enough?
The baby diapers business is very large but its growth has been flat primarily due to the saturated, competitive market and slow birth rate. Kimberly-Clark, the manufacturer of Huggies diapers and Kleenex tissues experienced 1.4% sales growth in the second quarter of 2014 and its sales rose to $5.43 billion. However, the organic sales, excluding the impact of foreign currency and restructuring, increased by a decent 5% for the second quarter. The international market is a key growth driver and Kimberly-Clark should focus on increasing its international network. Second quarter growth was primarily driven by international operations where organic sales increased 10%. Kimberly-Clark noted strong performances in several emerging markets last quarter, which included China, Brazil, Russia, and South Africa due to rising volumes. The expected economic improvement in the emerging markets may add more growth to Kimberly-Clark's income statement.
Kimberly-Clark is a very profitable company and its strong consumer brands can maintain consistent earnings growth. The decent top-line organic growth and $85 million worth of costs saved have helped the adjusted operating profit margins to improve 60 basis points to 16.1%. Second quarter adjusted earnings per share were $1.49 in 2014 compared to $1.41 last year. The company's performance benefited from organic sales growth, cost savings, and a lower share count. The company was also negatively impacted by input cost inflation, unfavorable foreign currency exchange rates, and lower net income from equity companies.
Kimberly-Clark did well in comparison to its competitor Clorox, which posted merely 0.5% currency-neutral sales growth in its latest quarter. Clorox also experienced a 5% decline in its adjusted earnings due to higher manufacturing and logistics costs as well as poor sales in some of its key categories such as cleaning and household products.
Looking at Kimberly-Clark's organic growth, due to decent growth from its international business and outperforming its competitors, it is clear that Kimberly-Clark is growing at a reasonable pace.
Why Should the Company Spin off its Healthcare Segment?
All of the segments contributed to the company's overall growth in profitability. The personal care segment, which is major segment of Kimberly-Clark, generated $2.4 billion in revenues with 2% growth. This was primarily due to an organic sales volume improvement of 5% and net selling price increase of 3%. However, currency rates and lower sales as a result of strategic changes in Europe restricted the growth. Despite that, this segment achieved 5% operating profits growth. Similarly, the consumer tissue segment generated $1.6 billion in revenues with a 1% growth rate. Net selling prices rose 3%, organic sales volumes improved 1% and the operating profits of $240 million reflected an increase of 9%.
On the other hand, the healthcare segment's quarterly sales of $0.4 billion declined 1% as currency exchange rates and product mix were both slightly unfavorable. Second quarter operating profit of $63 million increased 17% driven by lower marketing, research, and general spending, and costs saved.
Kimberly-Clark is pursuing a spinoff of its healthcare unit. This could be an additional catalyst, because Kimberly-Clark believes that it, and the subsidiary, would be worth more than the company in its current form. This is a fairly typical move for companies that believe high-growth segments would be awarded a higher valuation multiple as a separate entity.
This would be a tax-free event for shareholders and would create an independent company called Halyard Health that would generate approximately $1.7 billion in annual sales and hold leadership positions in the surgical products and medical devices markets. Kimberly-Clark anticipates it will complete the spinoff by the end of October.
Kimberly-Clark is trading at a trailing price to earnings multiple of 19.34 times and is inexpensive when compared to the industry average of 21.83 times. Kimberly-Clark is even more inexpensive when one compares its forward price to earnings multiple of 16.37 times to Proctor & Gamble's forward price to earnings multiple of 19.83 times.
Kimberly-Clark has many bright spots and a strong portfolio of leading brands. Kimberly-Clark delivers steady and consistent results each quarter and is able to generate solid growth going forward. There are many reasons to buy this stock including a tax-free spin-off, decent revenues and earnings growth, strong international results and an impressive dividend yield.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.