Kimberly-Clark: Still A Cash Flow Monster, But Question Marks Surround H2

Summary

• Kimberly-Clark performed very well in H1 thanks to an increasing revenue and decreasing COGS.
• Both the net income and free cash flow performance were excellent, but the second semester will very likely be weaker.
• KMB has restarted its share buyback program, and I expect the company to repurchase 1% of its outstanding shares by the end of the year.
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Introduction

Kimberly-Clark (NASDAQ:KMB) is one of the world’s largest producers of personal care and hygiene products. Everyone with kids will know the Huggies brand while the company also produces everyday essentials like Kleenex and toilet paper. Kimberly-Clark is active all over the world but still generates about half of its revenue in North America.

The first half of the year was excellent for Kimberly-Clark

Kimberly-Clark performed well in the second quarter as the company was able to record a 0.2% revenue increase, right on the back of a revenue increase of almost 10% in the first quarter of the year. Meanwhile, thanks to an excellent cost management program ($175M) and a commodity benefit ($80M due to lower pulp prices), the operating costs decreased which caused the gross margin to expand as the gross profit increased by about 20% on a relatively stable revenue.

Source: SEC filings

Thanks to this combination of an increasing revenue and lower COGS, while the G&A expenses increased by just a few percent and the interest expenses decreased by about 2%, the pre-tax income increased by over 40% to $856M while the net income attributable to the shareholders of Kimberly-Clark ended up at $681M which is almost exactly $2.00 per share. Given the $1.93 EPS in the first quarter of the year, the H1 EPS now came in at $3.93, about 40% higher than the $2.73 per share in H1 2019.

That’s great, but I also wanted to make sure the profit boost was backed by a simultaneous increase of the free cash flow result.

Kimberly-Clark reported an operating cash flow of $2.28B but this includes a $490M contribution from changes in the working capital position whereas in H1 2019, the company invested $525M in the working capital position. On an adjusted basis, the operating cash flow in H1 2020 was approximately $1.8B

Analyst’s 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.