As a leading provider of tissue and hygiene products, Kimberly-Clark Corp. (KMB, Financial) was one of those companies that received a Covid-19 pandemic boost instead of being hurt. This was led by tissue products such as Kleenex and commercial and industrial cleaning products. Roughly half of sales come from personal care and another third from tissue products. Its leading brands include Kleenex, Huggies, Depends, Kotex, Cottenelle and Scott. K-C Professional works with businesses to provide safety and sanitary products for the workplace. Approximately half of revenue is generated in the North America region and the remaining concentrated in Asia and Latin America.
The company just recognized its 150th anniversary and currently has a $47 billion market cap.
Commercial business
Kimberly-Clark is making a concerted effort to grow its commercial lines of businesses in order to drive further growth. The commercial business only represents 15% of total sales at this point. During a recent presentation, the company highlighted its improved commercial capabilities that are driving growth, which are increased innovation scale and speed, a stronger digital strategy, improved in-market execution and more effective revenue growth management.
The company noted its digital applications are now at more than 70% of global marketing spend, which increases return on investment and allows for better personalization to recruit new and specific customers and drive frequency to product. The company cited an example where 80% of the data acquired in baby and childcare is new moms, which provides it with potential lifetime customers.
Emerging markets
Developing and emerging markets represent only about 30% of total sales currently. Even though birth rates are declining globally, the company noted there is expected to be about 1.3 billion babies born over the next decade, in which the vast majority of those will be in developing and emerging markets. In those countries, the average spending per baby is believed to be about 15% of what is spent in developed countries. Developing and emerging markets for Kimberly-Clark primarily consists of Eastern Europe, the Middle East and Africa, Latin America and Asia-Pacific (excluding Australia and South Korea).
Financial review
The company recently reported first-quarter 2022 results, which were impressive on the top line but difficult in terms of operating income due to inflationary impacts. Organic revenue (excluding currency) increased 10%, which was mostly driven by price increases of 6%. Adjusted operating income decreased 22% to $629 million, which was largely impacted by $470 million of higher input costs, driven by pulp and polymer-based materials, distribution and energy costs.
Being a mature consumer products company, Kimberly-Clark typically generates strong levels of free cash flow. That was not the case in the first quarter as operating cash flow was $204 million against $253 million in capital expenditures. With key input costs expected to increase by $1.1 billion to $1.3 billion in 2022, it may be a tough year for free cash flow unless major price increases kick in.
Valuation
The company has provided detailed guidance for 2022, which calls for organic sales growth in the 4% to 6% range with operating profit down in the low to mid-single-digit range. Adjusted earnings per share are expected to be in the $5.60 to $6 range.
At the midpoint of that range, Kimberly-Clark would be trading at 24 times 2022 estimated earnings estimates. That compares to the company’s historical average price-earnings ratio of roughly 17 times. Even if we assume inflation will subside this year, analysts' earnings per share estimates for 2023 are approximately $6.79, which puts the company trading at 20 times earnings but still above its 10-year average.
The GuruFocus discounted cash flow calculation with an earnings per share starting point of $5.80, discount rate of 8% and 10-year earnings growth rate of 8% provides a value of $107, which puts it closer to its historical price-earnings ratio.
Competitors such as Clorox (CLX, Financial) and Church & Dwight (CHD, Financial) trade at much higher multiples than Kimberly-Clark, but that may not be a relevant comparison as those companies have a higher level of product focus on cleaning.
Kimberly-Clark is a dividend achiever with 50 years of dividend increases. The current annualized dividend rate is $4.65, which is dividend yield of 3.64%. The payout ratio on the current dividend is approximately 80%, which is high but should decline as the company returns to its true earnings potential.
Guru trades
Gurus who have purchased Kimberly-Clark stock recently include Ken Fisher (Trades, Portfolio) and Chuck Royce (Trades, Portfolio). Gurus who have reduced their stakes include John Hussman (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies.
Final thoughts
Kimberly-Clark is a well-managed company with some of the top brands in U.S. history, but appears to be overvalued at this time. The high input costs will eventually return to normal, but the timing on that is uncertain. I believe there will be a reversion to the mean with regard to the company’s valuation multiples, and it may be best to wait for that before the stock becomes a safe investment.
