2023-08-02 15:22:30 ET
Summary
- KMB's 2Q23 organic sales growth was 5%, with price growth offsetting volume decline.
- Management's focus on expanding market share through innovation and pricing adjustments is expected to drive growth.
- The current valuation of KMB is near its historical average, but the returns are not attractive for investment yet.
Summary
Following my coverage on Kimberly-Clark Company ( KMB ), which I recommended a hold rating due to my expectation that valuation would see a reversion to mean to 18x, implying a 20% downside to the stock. This post is to provide an update on my thoughts on the business and stock. I reiterate my hold rating, as I see the current valuation as fair.
Investment thesis
KMB's 2Q23 organic sales growth was 5%, with price growth of 8% and product mix growth of 1% offsetting volume decline of 3%. There was a 4% increase in organic sales for Personal Care, a 4% increase for Consumer Tissue, and a 13% increase for KC-Professional. The adjusted EPS of $1.65 for 2Q23 was also higher than the consensus estimate of $1.48.
KMB's business performance has remained steady, and I anticipate that this upward trend will continue as management concentrates on expanding the company's market share. Specifically, KMB's management still stresses their belief that the essential nature of KMB's categories plays a significant role in the continued health of these categories. Key developed markets like the UK (up double digits) and South Korea (up mid-single digits) are examples of regions where KMB is flourishing. I think management's plan to increase market share by improving large-count packs, expanding their availability in big-box channels, and lowering entry prices in smaller channels will be successful. The latter is crucial because it fits in with consumers' limited spending power right now. In fact, management has stated that they have seen sequential improvements in market share in key markets as a result of this strategy, and that they have noticed price gaps have begun to close.
“And so there was a bit of a gap that gap is now, I think that's basically closed over the last few weeks and so” 2Q23 earnings call
Given that the pricing gap vs competitors have closed, I expect volume performance to improve. The fact that volume has increased each quarter for the past two quarters has also bolstered my optimism. (4Q22: -700bps; 2Q23: -300bps). Although this is still in negative region, it shows that things are turning around. Management expects the volume improvement to continue throughout 2H23 as a result of increased investments behind brands and maintained commercial programs.
In terms of innovation, management has stated previously that new products introduced in the last three years accounted for 60% of organic sales growth in FY22. Therefore, I am confident that it will continue to drive growth as management has proven to be innovative.
“We are inventors at heart, new products created during the last three years, contributed to over 60% of our organic growth in 2022” 4Q22 earnings call
Valuation
Own calculation
I believe the fair value for KMB based on my model is $141. My model assumptions are that growth will resume KMB's historical growth range of low-single digits, supported by the closure of price gaps between peers’ products and its innovation ability to roll out new products. As the topline grows, KMB should also resume its historical pace of margin expansion.
Peers include: Clorox, Procter & Gamble, Unilever, Church & Dwight, Colgate-Palmolive, and Edgewell Personal Care. The median forward revenue multiple peers are trading at is 21.5x, and the expected 1Y growth rate is 5%. KMB's expected 1 year growth rate for revenue is 2%. As we can see historically, KMB has traded at an average discount of 13% to peers. Previously, I noted that the valuation at 22x was too high and that a revaluation would mean a higher risk to returns (which turned out to be right as the valuation has derated). At the current multiple of 19x, it is near its average, but the returns are not attractive for an investment yet, in my opinion. As such, I continue to recommend a hold rating.
Conclusion
KMB has seen a reversion to mean in valuation, currently trading at 19x, which is near its historical average. However, I think the returns are not attractive enough for investment at this point. That said, KMB's business performance remains steady, and management's focus on expanding market share through innovation and strategic pricing adjustments is expected to drive growth.
For further details see:
Kimberly-Clark Company: Valuation Has Reverted But Returns Still Not Attractive