Kimberly-Clark: All Set To Deliver Growth Going Forward

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Taking correct strategic actions to tap available growth opportunities.

Cost savings will result in profit margin expansion.

Stock is trading at a forward P/E of 19.5x, versus peers' forward P/E average of 21x.

Kimberly-Clark (NYSE:KMB) is one of the leading producers of hygiene goods in the world. The company has a 35% market share in the U.S. diapers market, in comparison to Procter & Gamble's (NYSE:PG) market share of 45%. To grow its top line numbers and address growing competition in the industry, KMB has correctly increased its strategic focus on innovation, geographical expansion, and brand investments. Also, the company is committed to improving its operational productivity, which will result in cost savings and will support margin expansion. Moreover, in the near term, the company's profit margins will be supported by commodity cost deflation. As the company will successfully execute its geographical expansion and product innovation, its stock valuation will expand; the stock is trading at a forward P/E of 19.5x, in comparison to its peers' average of 21x. However, strengthening of the U.S. dollar will weigh on growth in the near term.

Financial Performance and Growth Catalysts

The company targets organic sales growth of 3%-5% in 2016, which will be supported by its growing geographical presence, recovering home segment and healthy personal-care product demand. Also, roll-out of product innovation across different product categories and price increases will bode well for organic revenue growth. The company experienced organic revenue growth of 5% in 2015, up from 4% in 2014.

In 1Q16, KMB registered organic revenue growth of 2%, driven by an increase in sales volume. In China and Eastern Europe, the company experienced organic revenue growth of 5% and 25% for diapers. KMB has strong market growth potential in China, and it plans to achieve an increase in sales growth in China through brand investments, innovation and city expansion; KMB enjoyed double-digit volume growth for feminine care products and diapers in China for 1Q16. Also, the company has been increasing its online presence, as e-commerce sales grow. KMB generates more than 30% of its diapers sales from the online platform in China. Diaper market presents a substantial growth opportunity for KMB, as global diaper market is expected to grow at an annual rate of almost 7% through 2020 while Asia-Pacific region is projected to grow at a higher rate of 8.3%. As the company is aggressively working to tap the available growth opportunities, through innovation and expansion in emerging markets, analysts expect KMB's market share of baby diapers, wipes and training pants to increase to 19.1% by 2020, up from 18.7% in 2015.

Along with its efforts to grow its geographical footprint and revenues, the company has been working to improve its operational efficiencies and reduce costs, by streamlining supply chain and restructuring. KMB is working on 'Focus On Reducing Costs Everywhere' (FORCE) program, which is expected to result in cost savings of $350 million in 2016. Moreover, commodity cost deflation is expected to result in cost savings of up to $150 million in 2016, along with $50 million of savings from restructuring. Not only the expected cost savings will allow the company to expand its profit margins, but will also enable it to reinvest savings in business to support innovation and geographical expansion. Given KMB's robust cost savings program, along with its focus on price increases, I think its profit margins will continue to expand in the coming years. KMB's operating profit margin has risen to an all-time high of almost 18%, up from 14% in 2012.

Source: Bloomberg

Despite the company's aggressive measures to tap the available growth opportunities, I will recommend investors to keep an eye on the strengthening of the U.S. dollar. As KMB has been making efforts to grow its international presence, strengthening of the U.S. dollar will negatively affect its growth; the U.S. dollar strengthening had an adverse impact of 7% and 10% on the revenues in 1Q16 and 2015, respectively.

Valuation and Summation

The company is taking correct strategic actions to strengthen its market position, address competition and tap the available growth opportunities. The company's cost savings efforts will positively affect its profit margins and will allow it to reinvest the savings in the business. Moreover, the commodity cost deflation will augur well for its earnings growth. The company expects organic revenue growth of 3%-5%, which it plans to achieve through the roll out of product innovation and price increases. As the company will successfully realize its planned cost savings and expand in international markets, its stock valuation will expand; the stock is currently trading at a forward P/E of 19.5x, at a discount to its peers' forward P/E average of 21x.

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.