Kimberly-Clark Stock: Full Valuation Amid Headwinds, Hold

May 31, 2022 5:51 AM ETKimberly-Clark Corporation (KMB)1 Comment2 Likes

Summary

  • Kimberly-Clark delivered mixed results for its full-year 2021 and also Q1 2022 earnings, mixing some organic growth but also margin pressure.
  • Looking forward, macroeconomic headwinds such as supply chain disruptions, inflation, and strengthening dollar effects are very likely to persist.
  • Yet, the business is now valued at a premium above its historical average, leaving no meaningful margin of safety.
  • I do much more than just articles at Envision Early Retirement: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
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Investment thesis

Kimberly-Clark (NYSE:KMB) delivered mixed results for its full-year 2021 and also in its last earnings report.

Even though sales increased about 2% for the full year, adjusted share earnings fell 20% for the full year of 2021 due to a variety of headwinds. These were mostly macroeconomic difficulties out of KMB's control, and are most likely to persist and keep pressure on its margin and growth.

These headwinds included the tough cost environment, supply chain disruptions, inflation, and the negative impact of the strengthening dollar effects on its overseas sales. Yet, the business is now fully valued, or even at a premium above its historical average (by about 10% to 17% depending on the metrics you choose).

Considering the substantial uncertainties ahead and the lack of margin of safety here, my final verdict is a hold rating for this stock under its current conditions.

Kimberly-Clark business outlook

KMB delivered mixed results for its full-year 2021 and also Q1 2022 earnings. In Q1 2022, although its net sales came in at $5.1 billion, representing an increase of 7% YOY, diluted net income per share for the first quarter fell substantially. The net income came in at $1.55 per share, compared to $1.72 in 2021, an almost 10% decrease. Adjust earnings per share fell even more. After adjusting for certain extraordinary items, adjusted earnings per share were $1.35, representing a 25% decline compared to the $1.80 in 2021. Cash provided by operations in the first quarter also declined to $204 million, a decline of about $117M compared to the $321 million the firm raked in the same quarter during 2021. The decline in profits was caused by the lower operating margin and efficiency as detailed next.

Going forward, the business expects several headwinds to persist, as CEO Mike Hsu commented (the emphases were added by me):

I'm pleased with our team's continued excellent execution during this volatile and highly inflationary environment. We delivered double-digit organic sales growth with strong increases across all our segments in the first quarter. Our growth strategy is working and we're continuing to invest in our business. Additionally, we continue to take the necessary actions to mitigate macro headwinds and remain committed to improving our margins over time.

Kimberly-Clark near-term profits negatively impacted by macro headwinds

KMB earnings presentation

The headwinds the CEO was referring to include significant input cost inflation (creating a $2.7B headwind in 2021/2022), supply chain challenges that further exacerbate the inflation pressure, and also a strengthening dollar that negatively impacts its profits overseas. These difficulties have taken their toll on KMB's margins and operational efficiency.

As you can see from the following chart, the top panel shows its operating margin in the past ten years. Its margin has been as high as 18.7% and its average is about 14.4%. However, its current level is only 12.5%, about 50% below its peak margin level and also about 15% below its historical long-term average. In terms of asset utilization, the bottom panel shows that in the past decade, its peak utilization has been around 1.25 and the long-term historical average is about 1.15. And its current level of 1.11 again is below both the peak level and also the historical average by a good margin.

All told, these macro headwinds are very likely to persist and continue to pressure KMB's profitability and operational efficiency.

Kimberly-Clark operating margin and asset utilization

YCharts data

KMB stock valuation

Thanks to its earnings and dividend aristocrat status, the stock has been trading at a premium relative to the overall market in the long term, which is well justified. However, under its current price, it is also trading above its own historical average, leaving no margin of safety here. Its median P/E in the past decade has been about 20.0x. Currently, it is trading at 22.1x P/E, about 10% higher than its historical median.

The chart below also shows that it is trading at a premium too in terms of CFO (cash from operations). As you can see, in the past decade, its valuation in terms of CFO has fluctuated from about 9.7x to 21.6x, with a long-term average of 14.7x. Currently, it is valued at 17.3x times CFO. And again, this represents a sizable ~17% premium above its historical average.

Chart Description automatically generated

YCharts data

Final thoughts and other risks

KMB is a dividend aristocrat and a leader in the personal care space. The company boasts an A+ financial strength and many iconic brands to support its stable earnings. It presently operates in a challenging environment. It is taking a range of measures to raise selling prices to offset inflation, drive cost savings, and at the same time maintain CAPEX expenditures and invest in its brands. However, macro headwinds are likely to persist, including inflation, labor shortage, and foreign currency consequences impacts, which are all compounded by supply chain interruptions and global geopolitical conflicts.

Yet, the stock is currently priced at a sizable premium by historical standards. Currently, it is trading at 22.1x P/E, about 10% higher than its historical median of 20x. Its CFO multiple is at 17.3x, about ~17% above its historical average of 14.7x.

Considering the macroeconomic risks ahead and the valuation risks, my final verdict is a hold rating.

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** Disclosure** I am associated with Envision Research

I am an economist by training, with a focus on financial economics. After I completed my PhD, I have been professionally working as a quantitative modeler, with a focus on the mortgage market, commercial market, and the banking industry for more than a decade. And at the same time, I have been managing several investment accounts for my family for the past 15 years, going through two market crashes and an incredible long bull market in between. 

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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