Kimberly-Clark: Bull Run Is Not Over Yet

Kimberly-Clark (NYSE:KMB) reported strong fourth quarter earnings results. The earnings in this quarter more than doubled primarily due to a 5% rise in organic sales and the company's restructuring programs.

Kimberly Clark's revenues were virtually flat at $5.31 billion. The analysts estimated quarterly revenues of $5.28 billion for the company but organic sales, excluding foreign currency fluctuations and lost sales as a result of European strategic changes and pulp and tissue restructuring rose 5%. The growth was perpetuated by strong volumes in emerging economies like China, Russia and Vietnam and throughout most of Latin America, including Brazil and Venezuela.

If we analyze the performance of each individual segment the highest growth was seen in K-C Professional. Organic sales volumes and net selling price each improved 2% and the product mix was favorable by 1 point. The segment's year-over-year revenue growth was 2.5%.

The Health Care segment also helped in improving the top line performance with a 3% rise in sales volume. Medical device volumes were up in the high-single digits with strong growth in pain management products and a solid increase in digestive health offerings. The year-over-year revenue growth in this segment was 1.7%.

On the other hand, the strategic changes and restructuring actions in Western and Central Europe reduced the year-over-year revenue growth in Kimberly-Clark's other two segments. The strategic changes involved the sale or closure of European facilities and the streamlining of the administrative organization.

The company's largest revenue generating segment, the personal care segment, lost its sales as the company exited the diaper category in the European segment with the exception of Italy. The volumes were reduced by 3%, however the organic sales in this segment rose 6%.

Apart from the strategic change in Europe, Kimberly-Clark also divested or exited some of its lower margin businesses, mostly in the consumer tissue segment and this reduced the segment's sales by 3%. However, the rise in net selling prices, higher organic sales volume and favorable product mix partially offset the negative effects of restructuring. The year-over-year growth in this segment declined by 0.4%.

The company's full year net revenues increased 0.4%. For full year 2013, two of Kimberly-Clark's segments experienced positive growth while the other two experienced negative growth. The consumer tissue segment experienced the highest growth. The company's organic sales growth was 4%.

Operating Profit

Although the restructuring changes reduced Kimberly-Clark's sales in some of the segments this program has improved the company's gross and operating profits. During the fourth quarter of 2013, the company's gross profit improved 19%. This reduction was a result of the FORCE (Focused On Reducing Costs Everywhere) program; costs of production as a percentage of sales were reduced despite the input cost inflation.

Kimberly-Clark also reduced its marketing, research and general expenses by 6.3% which significantly improved the operating profits in this quarter. The operating profit reached $822 million compared to $449 million during the fourth quarter of 2012showing a considerable year-over-year increase of 83.1%.

The adjusted operating profit was $836 million in this quarter up 5% compared to $798 million during the same quarter of the previous year. Adjusted results exclude the strategic changes in Europe and the restructuring charges. The adjusted improvement in operating profits is also quite significant reflecting the company's success in effectively implementing its strategies.

For full year 2013, Kimberly-Clark's cost of products declined 2.8% resulting in the improvement of the year-over-year gross profit by 7.3%. This improved gross profit along with a reduction in marketing, research and general expenses expanded the operating profit by 19.4%. The adjusted operating income rose 7% and the adjusted cost savings under FORCE was $310 million.

Per Share Earnings

As a result of the higher gross and operating profits, Kimberly-Clark's net earnings reached $539 million compared to $267 million reflecting a growth of more than 100%. The earnings also benefited from the lower effective tax rate during this quarter compared to the tax rate of the fourth quarter of 2012.

The company's diluted per share earnings for the quarter was $1.40 per share beating the analysts' consensus estimate of $1.39 per share.

For the full year 2013, the company's net margin expanded almost 2% resulting in an increase in the year-over-year net income by 22.4%. For the full year, the company's net earnings also benefited from the higher share of net income of equity companies compared to 2012.

Diluted per share earnings in 2013 were $5.53 per share compared to $4.42 per share reflecting a YoY growth of 25.1%. Adjusted per share earnings for 2013 was $5.77 per share.

The table below shows that Kimberly-Clark's per share earnings in 2010 and 2011 dropped compared to the previous years. The culprit behind this negative growth was the increasing costs and expenses that squeezed the company's gross and operating margins.

Source: SEC Filings

However, as Kimberly-Clark started its strategic changes and restructuring programs in 2012 the growth of per share earnings started expanding again. By the end of 2013, the diluted per share earnings reached its highest level at $5.53 per share. Since the company is going to continue implementing FORCEI expect that the bottom line in 2014 will be even higher.

Dividend and Share Repurchases

For the fourth quarter of 2013, Kimberly-Clark's Board of Directors has declared a per share dividend of $0.81 per share reflecting a YoY growth of 9.5%, compared to the $0.74 per share declared in 4Q12. For full year 2013 the cash dividend declared was $3.24 per share compared to the $2.96 per share declared for 2012.

The dividends declared by Kimberly-Clark have been continuously increasing over the years even though the company experienced negative growth in per share earnings in 2010 and 2011. This shows the company's commitment to increase shareholder value even during challenging financial times.

The company's share repurchases for the fourth quarter of 2014 were 2.4 million shares at a cost of $250 million. Full year 2014 share repurchases totaled 12.4 million shares for $1.2 billion.

For 2014, the company's Board of Directors expects to increase the dividends and share repurchases. The adjusted per share dividend for 2014 is projected to increase 2% to 4% and would be effective from April 2014 whereas the share repurchases are expected to total $1.3 billion to $1.5 billion and are subject to market conditions.

2014 Outlook

For 2014, Kimberly-Clark's management expects sales ranging from a decline of 1% to an increase of 2% whereas the analysts polled by Thomson Reuters have estimated a 3% growth in sales for the year. As the company has divested its diaper business in Europe and has also exited from some of its lower-margin businesses it should now be able to focus more on its higher revenue generating businesses. The company has also announced it would divest its healthcare segment, another segment with negative revenue growth in 2013.Therefore, I expect that in 2014 Kimberly-Clark will be able to boost its revenues.

The company's margins will continue improving as continues its FORCE program into 2014. Cost savings of at least $300 million are projected from this program in 2014. Moreover, the pulp and tissue restructuring is anticipated to bring cost savings of $30 million this year and expand the company's margins.

The increased sales and expanded margins will bring higher growth to the bottom line. The company's management expects the adjusted diluted per share earnings to reach $6 to $6.20 per share reflecting an increase of 4% to 7% compared to the adjusted earnings per share of $5.77 in 2013.

Final Takeaway

Kimberly-Clark's strategic changes and restructuring programs have enabled it to improve its bottom line performance compared to the previous years. The company has wisely implemented all of its plans and now we can see the results. The management's intelligence has also increased shareholders' wealth in the last two years.

Since the company is going to continue these plans in the future I expect that the shareholder return will also continue to increase. The Board of Directors is expected to considerably increase the cash return to investors in the form of dividends and share buy backs so I recommend buying the stock.

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

Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Personal Products, Earnings
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