Kimberly-Clark's Long-Term Growth Prospects Stay Healthy Despite Short-Term Challenges

Summary

Company’s product innovation, cost-saving and international expansion efforts will bode well for its long-term performance.

KMB will continue to share success with shareholders through cash returns.

Stock is trading at a cheap forward P/E of 20x, versus its peers average of 22x.

Kimberly-Clark (NYSE:KMB) is one of the leading producer of hygiene products in the world. The company has strong product portfolio in stable consumer categories, and it has efficient global distribution capabilities. In the near-term, the company's performance might be affected by intense competition and challenges in emerging markets; however, the company's correct strategic decisions will bode well for its long-term performance. As the industry environment remains competitive, the company has increased its focus on global footprint expansion and product innovation to fuel growth and compete in the market. Moreover, the company's cost saving measures will result in margin expansion and support EPS growth in the coming years. Furthermore, KMB will continue to generate stable cash flows, which will be supported by modest revenue growth, low commodity input price volatility and cost saving measures. Also, the company will continue to share its success with shareholders through cash returns, which makes it an attractive investment prospect for income investors.

Financial Performance and Growth Catalysts

The company posted better-than-expected financial results for 2Q16. KMB reported adjusted EPS of $1.53 for 2Q16, up 8% YoY, and beating the consensus estimate of $1.48. Reported sales for the quarter came out to be $4.58 billion, ahead of consensus estimate of $4.51 billion. And organic revenues grew by 3% for the quarter, supported by 4% increase in sales volume. KMB performance for the quarter was positively affected by organic revenue growth, cost savings, and lower tax rates.

KMB performance in the long-term will be positively affected by its product innovation efforts, cost savings and expansion in international markets. The company's product innovation efforts are focused on launching products which are consistent with consumer demands, and will strengthen its product portfolio. Moreover, product innovation will improve the company's pricing power, which will support its organic revenue growth. Given KMB's active product innovation efforts and expansion in international markets, the company's market share in diapers, wipes and training pants category is expected to increase by 40bps to 19.1% by 2020.

Moreover, the company is working to improve cost structure, which will not only allow it to expand profit margin but also reinvest cost savings to support long-term growth. KMB cost saving efforts are expected to reduce its operational expenses by 3% in 2016. In 2Q16, the company was able to generate cost savings of $110 million, under its cost saving plan 'FORCE' and organization restructuring.

Moreover, the company's efforts to expand its footprint in international markets, especially in diaper category, will bode well for its top line and bottom line growth. Asia-Pacific region diaper market is expected to grow at a rate of 8.3% through 2020. However, in the near-term, the company will face challenges in China, which will pressurize its international segment performance. In the second half of 2016, in China, the company will face competition from Procter & Gamble (NYSE:PG) and Japanese manufacturers. Also, local Chinese manufacturers are entering the e-commerce diaper market, which will increase the competition, especially in low to mid-price range products. KMB currently generates 30% of its diapers sales from e-commerce in China. But I believe the company's efforts to expand in different cities, along with its product innovation efforts focused on premium priced products will augur well for its performance in the long-term.

Moreover, the company will generate strong cash flows in the future, which will allow it to share its success with shareholders through dividends and share repurchases. KMB expects to repurchase $700 million to $800 million worth of common shares in the next two quarters. Also, it offers a solid dividend yield of 2.8%, which makes it an attractive stock for income investors.

Summation

In the second half of 2016, KMB performance can come under pressure due to competition and challenges in emerging markets. However, the company's product innovation, cost-saving and international expansion efforts will bode well for its long-term performance. Also, the company will continue to share its success with shareholders through cash returns, which makes it an attractive stock for income investors. The stock is currently trading at a cheap forward P/E of 20x, versus its peers average of 22x. As the company will launch new products and continue to improve its cost structure, the stock valuation will expand.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.