Kimberly-Clark (KMB) reported mixed second-quarter results that showed decent revenue growth but bottom-line pressure due to cost inflation. Sales jumped to an all-time high during the period, up 8% (3% organic) driven by modest volume and price increases, though operating profit fell 12.1% from last year’s quarter as cost inflation more than offset its efficiency initiatives.
The firm’s operating margin plummeted from the year-ago period to 11.9% in the quarter, off 270 basis points, and well below our expectations. Despite the poor outlook regarding commodity-cost inflation, we are maintaining our $63 fair value estimate. We make our discounted cash-flow valuation model template available here.
click on image to enlarge
Source: Valuentum Securities Inc.
Kimberly-Clark raised its full-year sales outlook for 2011 to growth of 5% to 7% from 4% to 6% (organic growth 2% to 4%) --sales are up 6% so far through the first half of the year. The firm mentioned that the commodity cost environment worsened during the quarter, yet it maintained its full-year adjusted earnings per share guidance range of $4.80 to $5.05. However, it now expects full-year results to be at the lower end of this range.
We expect commodity costs, primarily polymer resin, superabsorbent, adhesives and other packaging materials, to continue to pressure results in the back half of this year and would not be surprised to see Kimberly Clark disappoint in its third quarter.
In the personal care segment, the firm experienced strength in adult care, baby wipes, and feminine care products, though infant and child care volumes fell during the period. Kimberly-Clark’s international operations continue to perform well, with sales jumping 19% in its personal care division thanks to solid volume expansion in China, South Korea, Brazil, Turkey, and South Africa.
We were disappointed by operating-income performance in the segment, which fell 10% during the period. The firm’s operating margin in its personal care segment fell to 17.1% in the quarter from 20.3% in the same period a year-ago, and we do not think the commodity-price environment is conducive for an abrupt recovery of profitability in this segment.
Sales in the firm’s consumer tissue segment jumped 9%, with operating profit increasing 15% in the period, a strong showing. Bathroom tissue volumes jumped at a double-digit rate--with Kleenex leading the charge with market share gains--and more than offset weakness in paper towel volumes. We were pleased with expansion across the board in this segment, with sales in North America and Europe up 5% and 11%, respectively. The segment’s operating margin expanded 50 basis points compared to the same period a year-ago, as it was better able to control costs in this segment.
The firm’s professional and healthcare segments reported growth of 6% and 14%, respectively. Segment operating profit declined in its professional segment due to cost inflation, but exploded 26% in its healthcare segment thanks to sales growth and cost savings. The professional segment continues to be impacted by high unemployment and office vacancy levels, and we do not expect a material change in these drivers in the back half of this year.
We expect continued expansion in its healthcare segment as the outlook for medical supplies (exam gloves, etc.) is much more favorable. We also like the steady improvement in operating margins in the healthcare segment both on a year-over-year basis and sequentially.
In all, we’d like to see Kimberly-Clark get a better handle on controlling costs before we would consider adding them to our best ideas list. We'd look for an entry point around $50 per share, which considers an adequate margin of safety based on risks inherent to its business.