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Robert Stephens, CFA
Robert Stephens, CFA
Articles (139) 

Why Kimberly-Clark Could Outperform the S&P 500

The company has a sound growth strategy

January 25, 2019 | About:

Investments in digital growth could boost Kimberly-Clark Corp.'s (NYSE:KMB) stock price. The company is aiming to build one-to-one relationships with customers in order to enhance loyalty. It is expanding its presence in developing and emerging markets, where it currently has lower levels of category penetration.

The consumer goods company is investing in product innovation as it seeks to further differentiate its brands from those of rivals. It will focus on consumer insights, while updating its manufacturing footprint to improve the speed-to-market and consistency of new products.

Although operating conditions are expected to remain challenging, an efficiency program could offset weaker volume growth. Having fallen 10% in the last year versus a 6% decline for the S&P 500, the stock appears to have investment appeal.

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Refreshed strategy

An increasing focus on innovation could catalyze the company’s financial performance. It intends to maintain or expand its market share position through an improved product experience. It will invest more in understanding consumer insights and how consumer tastes are evolving, which is expected to lead to improved product differentiation as well as a trade-up of customers to higher-priced products. Kimberly-Clark is starting from a strong position, with its portfolio of brands having a number one or number two position in 80 countries across its key segments.

Kimberly-Clark intends to update and standardize its manufacturing footprint in order to bring its innovation pipeline more quickly to market. This should also provide greater consistency in product quality across different regions. It is moving more research and development resources into local markets to enable a faster pace of innovation. It will use an adapt and deploy model for smaller markets while using category-building marketing campaigns and in-market activities to develop key growth markets. Net revenue management will enable it to grow core businesses with greater process discipline and a more efficient use of capital.

Investment

Kimberly-Clark will increase investment in digital opportunities. It will be used to build one-to-one customer relationships, with its products well positioned for this due to their high recognition and consumer trust. It will deploy data-driven marketing with precision targeting to personalize consumer engagement where possible. This strategy has improved customer engagement, loyalty and return on investment where it has already been implemented. The company intends to roll it out globally after gaining experience in China, South Korea and the U.S.

The company will expand its presence in developing and emerging markets, where it currently has relatively low levels of category penetration. It will invest in areas such as baby wipes and feminine care. Diapers is expected to be a $35 billion incremental market opportunity if the average spending per baby in developing and emerging markets rises from 15% of the U.S. spending level today to one third of the spending level over the long term. Further investment in early-stage markets such as India and Africa is expected to lead to a high return on investment in the long run.

Growth potential

Kimberly-Clark has faced challenging operating conditions in recent years. Macro headwinds in Latin America, price competition in China and birth rate declines in South Korea and the U.S. have negatively affected category growth. It expects those factors to remain in place in the short run since they are cyclical. It has also faced a high level of commodity inflation, which is expected to be between $300 million and $400 million in fiscal 2019.

In response to challenging operating conditions, the company is aiming to deliver $400 million to $450 million of total cost savings. This is partly made up of savings from its restructuring program, which is the largest in its history and will focus on its supply chain. Its FORCE program has generated savings of $3.4 billion in the last decade. It is expected to continue to run over the long term as the business aims to become leaner and more efficient in adapting to changing operating conditions.

Outlook

Investing in product innovation could improve Kimberly-Clark’s financial prospects. It is aiming to differentiate its products more effectively in order to improve customer loyalty. An updated manufacturing footprint may enable it to bring new products to market more quickly, while ensuring greater consistency between different regions.

Expansion in developing and emerging markets is expected to deliver a high return on investment. Investment in digital opportunities is set to improve customer loyalty through one-to-one relationships with consumers.

While macroeconomic conditions are forecast to remain challenging, a cost-reduction program is due to offset low volume growth in the short run. Having underperformed the S&P 500 in the last year, the stock could produce index-beating performance in the long run.

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