Kimberly Clark - Solid Execution, "Full" Valuation

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Shares of Kimberly Clark (NYSE:KMB) jumped up on Tuesday after the personal product and tissue giant reported solid third quarter results, driven by cost control and operational excellence.

Despite the excellent results I would remain cautious as shares are "fully" valued, leaving few prospects for short to medium term outperformance.

Third Quarter Results

Kimberly Clark generated third quarter revenues of $5.26 billion, up 0.3% on the year before, thereby coming in ahead of consensus estimates at $5.23 billion.

Operating earnings advanced by some 3.1% to $807 million. The company reported a 5.6% increase in net earnings attributable to shareholders.

As Kimberly Clark engaged in quite some share repurchases over the past year, earnings rose by 9.2% to $1.42 per diluted share. Adjusted earnings came in at $1.44 per share, ahead of consensus estimates of $1.40 per share.

CEO and Chairman Thomas Falk commented on the performance, "We delivered another very good quarter of results in a challenging environment. I'm particularly encouraged that we achieved organic sales growth of 5 percent, which reflects progress with targeted growth initiatives, innovation programs and revenue realization strategies."

Looking Into The Results

Despite merely 0.3% growth in revenues, Kimberly Clark had a solid quarter in terms of execution. Despite the modest revenue growth, cost of goods in actual dollars fell by 0.7%.

Note furthermore that organic sales rose by 5%, driven by a 3% increase in volumes. The remainder of growth was driven by a 1% increase in pricing and the remainder through a favorable product mix. Unfortunately these positive developments were largely made undone by restructuring actions in Europe and unfavorable exchange movements.

As such gross margins saw a nearly 60 basis points jump to 34.3% of total revenues. A slightly lower tax rate and higher income from equity investments, combined with share repurchases explain the solid earnings per share growth.

Looking Ahead

For 2013, Kimberly Clark now sees adjusted earnings per share of $5.65-$5.75 per share, up 8-10% from 2012's earnings of $5.25 per share.

Last year, Kimberly Clark already announced the decision to restructure its European business to focus on more profitable investments. As such, the company divested the diaper category and lower margin tissue segments in some of its European markets.

As a result of these actions, the company is expected to take $350-$400 million in restructuring costs, of which 50-60% are cash costs. So far, the company has already taken $366 million in restructuring costs, after taking $14 million costs during the third quarter.


Kimberly Clark ended its third quarter with $1.18 billion in cash and equivalents. Total debt stood at $6.48 billion, for a net debt position of around $5.3 billion.

Revenues for the first nine months of the year rose by 0.6% to $15.85 billion. Strict cost control was the main driver behind a 8.1% increase in net earnings to $1.60 billion. Earnings per share rose by some 10.7% to $4.13 per share. At this pace annual revenues could come in above $21 billion, with adjusted earnings seen around $5.70 per share.

Factoring in gains of 4% on Tuesday, with shares trading at $103 per share, the market values the company at $39.5 billion. This values operations at 1.9 times annual revenues and 18-19 times annual earnings.

Kimberly Clark currently pays a quarterly dividend of $0.81 per share, for an annual dividend yield of 3.1%.

Some Historical Perspective

For most of the past decade, shares of Kimberly Clark have traded in a $40-$70 trading range. Halfway through 2012, shares broke out to the upside of this range and steadily moved up to all time highs of $106 in May of this year.

After a recent pull-back to $95, shares have re-bounded, trading within sight of all time highs.

Between 2009 and 2012, Kimberly Clark has increased annual revenues by some 10% to $21.1 billion. Net earnings fell by a similar percentage towards $1.75 billion, partially offset by share repurchases.

Investment Thesis

So far, shares of Kimberly Clark have already advanced some 20% year to date. Solid cost control and top line growth, combined with investors starving for yield are the main reasons behind these returns.

Note that the company, both through personal care products such as Huggies and Kotex, as well as through tissues such as Kleenex and Cottonelle, is seeing solid organic growth of 5% over the past quarter. Growth is accelerating on the back of advertising and innovation.

Note that analysts were looking for organic growth rates of 3%, comparable with the growth rates reported in the first half of the year. Growth was mainly driven by emerging markets. For instance, diapers sales rose by 45% in China, 35% in Russia and 20% in Brazil.

These strong brands make that Kimberly holds many #1 or #2 brand rankings through large parts of the world. On the back of these strong positions it allows the company to generate fat cash flows to investors. Besides paying out a decent 3.1% dividend yield, Kimberly Clark also plans to retiree $1.2 billion in stock for this year, around 3% of its shares outstanding at current levels.

The coming quarter will continue to be important, as the company stands to reduce the number of Huggies diapers per package by 7% in the US. It aims to do this however without lowering prices. The rationale behind the move is to bring the size more in line with competition, but it remains to be seen how consumer will react.

Note that the company continues to keep a close eye on costs, as the company cut costs by $70 million under its FORCE plan, which was offset by a $55 million cost increase for raw materials and transportation. Note that the company still sees a healthy pipeline for cost cuts into 2014, which should continue to support earnings growth for some time.

I would urge investors to remain cautious. While Kimberly Clark is the proud owner of some world-class assets, the valuation at 19 times earnings is a bit steep. This furthermore appears to be mostly driven by low interest rates, combined with a nice 3% dividend yield and a similar share repurchase yield.

I don't see any compelling reasons which could push shares much higher in the short term.

Disclosure: I 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.