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This Leading Manufacturer of Health and Hygiene Products Is a Decent Buy

June 16, 2014 | About:
abirk

abirk

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There are certain things on which people have become dependent, and they cannot imagine life without them. Kimberly-Clark Corporation (KMB) is one of the largest personal-products companies in the world, and together with its subsidiaries, manufactures and markets personal care, consumer tissue and health care products made from natural or synthetic fibers using advanced technologies in fibers, nonwovens and absorbency worldwide. The Irving, Texas-based company operates in four segments: Personal Care, Consumer Tissue, K-C Professional, and Health Care. To name a few, Kleenex, Cottonelle, Depend, Huggies, Kotex, Scott are some of Kimberly-Clark’s brands.

Going By the Numbers

Kimberly-Clark grew organic sales 4% year-over-year for the most recent quarter. This is in-line with the company's long-term expected growth rate of 3% to 5% per year. On May 1, Kimberly Clark raised its quarterly dividend by 3.7% to $0.84 per share; this marked the 42nd consecutive year in which Kimberly Clark has increased its dividend and the 80th consecutive year in which it has paid dividends to shareholders.

Kimberly Clark's management said it continues to anticipate $1.3 billion-$1.5 billion in total share repurchases for the year; these repurchases will help boost the company to its earnings-per-share growth goals, and in combination with dividend payments this will result in $2.5 billion returned to shareholders over the course of the year.

The Personal Care division grew organic revenue 7% for the most recent quarter, the highest of any Kimberly-Clark division. Consumer Tissue increased organic revenue 3%, K-C professional organic revenue was up 4%, and Healthcare organic revenue was up just 1%.

Kimberly-Clark's future growth will come primarily from continued international expansion. About half of Kimberly-Clark's revenues are from international sales.

Kimberly-Clark is expected to spin off its Healthcare division in the 3rd or 4th quarter of this year. The spin-off will create a healthcare company with $1.6 billion in net sales. Strategically, the move will benefit Kimberly-Clark by giving management the freedom to allocate capital exclusively to its faster-growing consumer products divisions.

In 2012, Kimberly-Clark announced plans to restructure its European business. It exited the diaper business in most of Western and Central Europe. It also divested or exited lower-margin businesses in certain European markets, mostly in the consumer tissue market. Both moves crimped overall sales in the fourth quarter, but emerging markets remain strong. Volumes increased in China, Russia and Vietnam and most of Latin America, including Brazil and Venezuela.

In November, the company announced plans to spin off its health care business, which focuses on surgical and infection prevention products and medical devices. In 2013, the business contributed $1.62 billion in sales, or nearly 8% of total sales. Kimberly-Clark plans to complete the spinoff by the third quarter.

Emerging Markets

The company’s revenues grew at an annual rate of 8.6% in emerging markets over the three-year period ending 2012. The region’s share in Kimberly-Clark’s top line increased from 31% in FY09 to 36% by FY12. Emerging markets (particularly China, Russia, and Latin America) continue to be the company’s prime targets for expansionary projects. Kimberly-Clark has announced that it will launch new products in these markets this year, and that it plans to expand the high-growth adult and baby care product categories in these regions.

Although the company has set lofty expansionary targets for emerging markets, a looming slowdown in these markets is likely to put a damper on the company’s efforts to improve its consolidated topline. Annual GDP growth rates in all the three regions (China, Russia, and Latin America) where Kimberly-Clark is looking for expansion have been on the decline since 2010. News out of China is that GDP growth is bound to continue declining through 2015, which will impact Kimberly-Clark’s revenue growth rates. Growth in Russia and Latin America, on the other hand, is expected to improve in 2014, but at a lower rate than in 2012.

Europe Restructuring

The company started restructuring its Europe division in 2012 so as to shut its low-growth and low-margin categories there and divert resources to relatively stronger markets.

The restructuring effort, which entailed shutting down manufacturing facilities and streamlining the company’s administrative operations, was initiated in 4QFY12 and is expected to be completed by the end of this year.

Kimberly-Clark has also announced plans to exit its diaper businesses and shut its low-margin Consumer Tissue segment in Western and Central Europe (with the exception of Italy). These businesses generate about 2.4% of the company’s total sales, but bring in few profits. The company, which has staggered its exit strategy, has already accounted for the major portion of the impact the business closures will bring about in FY12 and FY13 sales.

Geographical Breakdown

Kimberly-Clark divides its operations into three broad geographical regions: North America; Europe; and Asia, Latin America, and Other.

The company generates the bulk of its revenues from North America (49%), almost 94% of which is generated in the US alone. The company’s second-most important geographic segment is Asia, Latin America and Other, which contributes 36% of the company’s topline.

Future Prospects

Kimberly-Clark has many products which cater to many different consumer demographics. Some products such as Kleenex cater to all demographics and the brand has enviable cultural standing. The brands that make the future prospects of this company the brightest and most exciting in my view are the various diaper lines. I think the adult diaper line has especially strong growth potential. The brands that make the future prospects of this company the brightest and most exciting in my view are the various diaper lines. I think the adult diaper line has especially strong growth potential.

To End

Kimberly-Clark employs about 57,000 people in 61 countries and its products are currently available in more than 175 countries. The company’s relatively narrow business model, along with lucrative equity investments in affiliated companies, will help to outperform its peers in the near future. Kimberly-Clark is a company that has been delivering solid earnings for a long time. It has also a record of consecutively increasing dividends for 37 years. The company’s business in Asia, Latin America, the Middle East, Eastern Europe and Africa will continue to execute targeted expansion and growth plans and take advantage of attractive market opportunities. I am therefore pretty bullish that Kimberly-Clark is going to be on a roll in 2014.


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