Is Kimberly Clark Corp (NYSE:KMB) Worth Adding To Your Portfolio?
Kimberly Clark Corp (NYSE:KMB) posted EPS and revenue figures for 4Q2015 that missed the consensus estimates as currency headwind took the blame for the lackluster quarter. The management predicted that currency headwind will persist in 2016, resulting in up to 6% adverse impact on the year’s profit. Kimberly Clark also faces growing competition in the diapers segment.
But is all gloom for Kimberly Clark? This Kimberly Clark analysis article brings out the company’s strengths and weaknesses to help you make informed investment decision. But first is a quick recap of Kimberly Clark’s last quarter’s earnings results and guidance for the current year.
Kimberly Clark Corp (NYSE:KMB) posted adjusted EPS of $1.42 on revenue of $4.54 billion. Both the EPS and revenue readings missed the consensus estimates. EPS increased 5.2% YoY while revenue declined 6% YoY. Unfavorable shift in foreign exchange rates was blamed for the weak 4Q2015 numbers.
The chart below captures Kimberly Clark’s revenue and cost of revenue for the last five quarters:
For 2016, Kimberly Clark Corp (NYSE:KMB) is targeting adjusted EPS in the range of $5.95 to $6.15, which suggests potential upside of about 3% to 7% over 2015 figure. Revenue for the year is expected to be flat or decline by 3% as currency headwind persists.
What’s exciting about Kimberly Clark?
- Cost-saving initiatives
Kimberly Clark Corp (NYSE:KMB) came up with a cost-saving initiative called Focus On Reducing Costs Everywhere (FORCE). Through the FORCE program, Kimberly Clark has made significant cost saving gains over the past several years and more cost-saving is expected in the coming years.
In 2011, FORCE program generated $265 million in cost-savings, rising to $295 million in 2012 and rising further to $310 million in 2013. In 2014, the FORCE program contributed 320 in cost-savings, which rose to $365 million in 2015. In 2016, the management of Kimberly Clark is targeting at least $350 million in additional cost-saving from the FORCE program.
- Restructuring initiative
Besides the FORCE program, which is primarily geared towards trimming costs, Kimberly Clark, also has a restructuring program that is primarily geared towards simplifying the organization and freeing up resources for investment in growth initiatives.
Kimberly Clark offloaded its healthcare business in a spinoff transaction as part of its restructuring efforts. The company is working to finish its restructuring phase by the end of this year and accumulated savings of between $120 and $140 million are expected by the end of 2017. For this year, Kimberly Clark is looking to save at least $50 million under the restructuring program. It saved $65 million in 2015, which was perfectly within its targeted range of $60 to $80 million.
- Sharp focus on product innovation
In the recent years, Kimberly Clark Corp (NYSE:KMB) has increased focus on product innovation to improve its existing portfolio and pave the way for new product launches. Aggressive product innovation is enabling the company to cope with intense competition in its industry, acquire more market share and expand into newer markets and categories.
Through innovation, Kimberly Clark has succeeded in elevating its profile in key product segments such as female personal care, diapers and paper goods.
This year, the management is planning to roll out more product upgrades under the Huggies brand, especially targeting developing and emerging markets. Additionally, the management is looking to expand into more Chinese cities this year, targeting to cover 130 cities with Huggies diapers by the end of the year up from 115 cities presently covered.
- International growth opportunity
Kimberly Clark Corp (NYSE:KMB) is pursuing a huge growth opportunity outside its North American domain. Internationally, the company is particularly targeting developing and emerging markets in South America, Eastern Europe, the Middle East, Asia-Pacific and Africa.
Other than developing and emerging markets, Kimberly Clark is also hunting for new growth opportunities in developed markets outside North America such as Australia, South Korea and Western and Central Europe.
It is worth pointing out that Kimberly Clark’s personal care business is showing particularly strong growth in developing and emerging markets with double-digit percentage growth rate in recent years.
Given its increased focus on product innovation and solid brand reputation, Kimberly Clark has the characteristics it needs to succeed in the new markets it is targeting abroad.
What’s worrying about Kimberly Clark?
- Unfavorable forex movements
Other than the risk of inflation, Kimberly Clark Corp (NYSE:KMB)’s international footprint also exposes it to risk of unfavorable shifts in foreign exchange rates. The stronger dollar is erasing Kimberly Clark’s gains abroad because international sales shrink in value when they are converted to dollar.
Currency headwind is expected to persist in the coming quarters with the management considering price hikes in the international markets to offset forex headwinds. However, price hikes could slow down sales and give low-cost rivals the opportunity to displace Kimberly Clark.
- Tough competition
Although Kimberly Clark Corp (NYSE:KMB) continues to pump money into product innovation to boost its competitive advantage across product categories, there is one segment that is not responding well – diapers. Procter & Gamble Co (NYSE:PG) is giving KMB a run for its money in the diapers category from all directions.
PG’s cheaper diaper brand known as Luv is pressing Kimberly Clark’s Huggies from below while PG’s premium diaper brand Pampers is hitting Huggies from above.
- Soaring product costs
Although lower oil prices have helped lower the cost of some raw materials that Kimberly Clark Corp (NYSE:KMB) uses for production, not everything has come down. In North America, the cost of polypropylene resin is far from being stable, posing production uncertainties.
Because of its broad international presence, Kimberly Clark is prone to risks of inflation that are driving up costs of raw materials.
Kimberly Clark Corp (NYSE:KMB) has a disciplined capital deployment culture that prioritizes investment in growth initiatives and returning value to shareholders. The company returns value to shareholders through a combination of shares repurchases and dividends. It is worth pointing out that KMB has boosted its annual dividend payout for the last 44 consecutive years.
Last year, Kimberly Clark returned a total of $2.1 billion to shareholders through a combination of buybacks and dividends. This year, the management is targeting to return between $600 and $900 million to shareholders through buybacks alone. Dividends for this year have been boosted 4.5% over 2015 figure.
Kimberly Clark Corp (NYSE:KMB)’s bet on product innovation and international expansion could pay off handsomely in the future despite growing pressure in the diapers segment.
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