Back in the middle of March, I stated my expectation that Kimberly-Clark Corp. (KMB, Financial) was well suited for the difficult environment that was starting to form due to the pandemic. The company’s products, such as diapers, toilet paper and tissue, would remain in demand even as other sectors of the economy suffered.
Following second quarter results it looks as though that thesis has played out. Shares are higher by more than 9% since I examined the company in-depth. Thus, is Kimberly-Clark still a candidate for purchase at the current price?
Second quarter highlights
Kimberly-Clark reported second quarter highlights on July 23. Revenue was higher by just 0.4% to $4.6 billion, though this was $128 million ahead of what Wall Street had expected. Adjusted earnings per share increased 53 cents, or 32%, to $2.20. Analysts that cover the company had expected EPS to grow year-over-year, but Kimberly-Clark delivered a 43-cent beat.
Organic sales improved 4%, higher than consensus estimates of 0.6%. Increased product volumes added 2% to growth while net pricing and product mix each added 1%. Currency exchange was a 4% headwind to results.
For North America, consumer tissue had an especially strong quarter, as organic sales improved 22%. Volumes were higher by at least double-digits for each major product category. This segment benefited from higher at-home consumption as well as supplementary stocking for bathroom tissue. Personal care improved 5% due to higher demand for Huggies diapers and baby wipes. Child care products also saw strengthening demand. K-C Professional was the weakest component of the business as sales were down 3%, largely due to a 20% decline in washroom volumes. Safety volumes were also down double-digits. Wipers and other products performed well, with double-digit gains in volumes.
Developed markets outside of the U.S., which includes Australia, South Korea, Central and Western Europe, increased 3%. Consumer tissue was again the leader as sales improved 8% due to a 7% improvement in volumes. Consumer products declined 9%, mostly due to an 11% headwind from currency exchange. Product mix added 2% to growth. K-C Professional was down 12% as volumes tumbled 17%.
Developing and emerging markets had an organic sales decline of 3%. Personal care improved 2% with strong double-digit contributions from China and India. Consumer tissue was lower by 9% as currency and volume declines were the primary contributors. K-C Professional was down 35% as volumes dropped 32%.
The company was on pace to grow or maintain its market share in approximately 60% of the categories and regions that it measures. North America market share improved in five out of eight categories. Kimberly-Clark grew or maintained its leadership in key categories in China, but had uneven performance in Latin America.
Kimberly-Clark performed quite well on a number of metrics for the quarter. Overall operating margins improved 470 basis points to 21.9%. Consumer Tissue operating margins improved a remarkable 1,100 basis points to 26% and Personal Care increased 210 basis points to 23.3%. The operating margins for K-C Professional, which struggled mightily during the quarter, improved 170 basis points due to cost controls.
Cash from operations reached an all-time record of $1.6 billion, which was a 159% increase from the prior year. The company distributed $400 million of dividends during the quarter and did not repurchase shares for most of the quarter as the company looked to maintain capital. Free cash flow totaled $1.3 billion for the quarter. This means that dividends were well-covered during the quarter, as they consumed less than 31% of free cash flow.
Kimberly-Clark also restarted its share repurchases as of July 24 after pausing them in the first quarter.
Kimberly-Clark ended the second quarter with $5.9 billion of current assets, including nearly $1.5 billion in cash and equivalents. Long-term debt stands at $7.2 billion, but the company has just $850 million in debt due within the next year.
The company also reissued guidance after pulling it following first quarter results. The company expects adjusted EPS of $7.40 to $7.60 for 2020, which would be a 7% to 10% increase from 2019 results. The midpoint of this guidance is 5 cents below consensus estimates.
Valuation
Kimberly-Clark had a solid quarter even as revenue was essentially flat for the year. Under difficult circumstances, the company grew its leadership position in several areas. Currency exchange is often a challenge for the company, so the negative impact wasn’t surprising. The company did see growth in the majority of businesses and its largest markets. Overall, the company performed as I had expected and took advantage of consumer demand in key areas.
Shares of Kimberly-Clark closed Friday’s trading session at $147.34, giving the stock a forward price-earnings ratio of 19.6 based on its latest guidance. This is below the 10-year average price-earnings ratio of 21.1.
Reaching this long-term average price-earnings ratio would result in a share price of ~$158, a 7.4% increase from the most recent closing price. Add in the stock’s 2.9% dividend yield and shareholders of Kimberly-Clark could see a ~10% total return if they buy at the current price. It is worth noting that the company has increased its dividend for 48 years.
Because of the company’s performance in the quarter, its ability to offer guidance in an uncertain environment, the potential for a double-digit total return and a long dividend history, I continue to believe that Kimberly-Clark is a buy at current prices.
Author disclosure: no position in any stock mentioned in this article.
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