2023-04-28 01:34:53 ET
Summary
- Kimberly-Clark put up solid Q1 results, helped by price increases.
- Emerging market volumes have declined, but the area remains its biggest long-term opportunity.
- KMB stock looks fully valued based on its historical valuations.
Kimberly-Clark ( KMB ) posted solid Q1 results powered by price increases. However, the stock looks fully valued.
Company Profile
KMB is a consumer product company that makes tissue and personal care products. The company operates in three segments.
Its Personal Care segment sells things such as disposable diapers, baby wipes, swimpants, feminine and incontinence care products, training pants, and reusable underwear. It sells these products under the Huggies, Pull-Ups, Little Swimmers, GoodNites, DryNites, Sweety, Kotex, Depend, and other brands.
Its Consumer Tissue segment offers facial and bathroom tissue, paper towels, napkins and related products. Its brands include Kleenex, Scott, Cottonelle, Andrex, Viva, Scottex, and other brands. KMB's K-C Professional segment sells products such as wipers, tissues, towels, apparel, soaps, and sanitizers to businesses and other organizations. Its brands include Kleenex, Scott, WypAll, Kimtech, and KleenGuard.
Opportunities and Risks
Like many companies in the consumer space, KMB faces the risk of consumers trading down to cheaper private-label products, especially in a high inflationary environment where it has to raise prices. This can be seen in its Q1 results, where volumes fell -5% overall. This was even more pronounced in developing and emerging markets, where personal care volumes were down -10% and consumer tissue volumes fell -9%.
Personal care products tend to be one of the first categories where people switch to private-label when prices go up and they feel some strain on their budgets. And as I noted in my earlier write-up on Procter & Gamble (PG), the perception regarding private-label brands has also been shifting , as in-house brands have become better quality over the years.
Numerous consumer products companies saw their volumes decline in calendar Q4, including Clorox ( CLX ), Church & Dwight ( CHD ), Colgate-Palmolive ( CL ), and PG. Thus far in calendar Q1, volumes have remained under pressure from those companies that have reported, such as PG and KMB.
Currency has been another headwind, negatively impacting its Q1 results by -4% and its Q4 results by -5%. FX is expected to be a headwind in Q2 as well.
Another more unique headwind for KMB is slowing birth rates given that it is in the diaper business. This is both true in the U.S. and globally. Some markets such as South Korea are even more pronounced, with birth rates declining at a much faster rate than the global average. This phenomenon is even impacting countries like China.
That said, continued expansion into developing and emerging markets is still one of KMB's biggest opportunities over the long term. Average spending per baby is still much less in these markets, and there is still a trend toward premiumization as income levels rise. However, as noted above, inflationary pressure has hurt volume growth in these markets at present.
Discussing its global opportunity at a last year's CAGNY conference, Chief Growth Officer Alison Lewis said:
People are willing to spend more on their babies if the brands drive solutions that surprise and delight. As we look to the out years based on projected category growth and diaper dollars per baby, we do not see this slowing down. In markets like South Korea, where birth rates are declining 3x faster than the global average in the last 5 years, we continue to grow diapers and pants and beyond. The Korean baby and childcare portfolio is really a model for premiumization, not only bringing added diaper and pant benefits and tiering up but also innovation around natural behaviors in regimen with brands like Green Finger, which looks at total skin care for baby. It's become the second largest brand in the market for baby skin care, and the #1 brand for Sun Care. And then, of course, expanding and developing and emerging markets. This is our single largest growth opportunity. And today, D&E accounts for about 30% of our sales.
Although birth rates are declining globally, there will be 1.3 billion babies born over the next 10 years and over 90% of those are in D&E markets. And yet the average spending per baby in D&E was only about 15% of the U.S. level. The growth upside is massive. We have made very good progress in the last 3 years with growth in the 6% to 8% range. As we look to accelerate growth by continuing to scale our winning approach in new future growth engines like Nigeria and India. We focus on understanding the shopper and the role of our category in their lives, so we can cater to the local consumer."
Continued product development and expansion into adjacent categories is another opportunity. The company said it will refresh its Cottonelle Ultra Comfort and Ultra Clean this year, as its research shows half of users in the "soft and strong bath tissue" are not satisfied with the products. It also said it will have exciting news regarding Huggies later this year. Its professional segment will also introduce a new advanced towel dispensing system.
In the near term, price increases and margin recovery are the bigger drivers. In Q1, KMB saw price increases contribute 10% to growth. This was most pronounced in its KC Professional segment where prices were up 17%. Personal Care prices were up 7%, and Consumer Tissue prices rose 11%.
This combined with lower transport and energy price has helped margins to begin to recover. In Q1, the company saw its gross margins improve 340 basis points to 33.2%. This is still below pre-pandemic levels when it recorded gross margins of 35% in FY2019.
Q1 Earnings
KMB saw its Q1 revenue rise 2% to $5.2 billion. That was ahead of consensus estimates by $140 million. Organic sales climbed 5%. EPS came in at $1.67, 30 cents ahead of expectations, and up 24% versus a year ago.
Price contributed 10% to sales growth, while mix added 1%. Volumes were down -5%.
By segment, Personal Care volumes fell -5%, while price rose 7%. Overall organic sales were up 3%. Consumer Tissue volumes dropped -5%, while price rose 11%. Overall organic sales were up 7%. Its KC Professional segment saw volumes decline -6%, while price rose 17%. Overall organic sales were up 11%.
Volumes in developing markets were generally weak. Addressing this issue in its Q1 call, CEO Michael Hsu said:
While our categories continue to grow, we see bifurcation in consumer demand. We've observed resilience in higher income developed markets like the U.S. but also increasing demand for value in lower income geographies, especially within D&E markets. We're meeting our consumers where they need us. As category leaders, we have a broad offering that spans value to premium. While we're continuing to see momentum in the premium tiers of our business, we're accommodating tighter budgets and more rapidly cascading innovation and product features through our portfolio, including our value offerings."
Gross margins improved 340 basis points to 33.2%.
Looking ahead, the company reiterated its full-year guidance for organic sales growth of 2-4%. Adjusted EPS guidance was upped to growth of 6-10% versus prior guidance of 2-6%. The company still expected to buy back $100-150 million in sales for the year.
As has been typical for the consumer products industry, KMB saw price increases overcome volume declines in Q1. Consumers are pushing back, as indicated by the volume declines across its segments, and once price hikes are exhausted, it will likely become harder for KMB and others in the space to grow as strongly.
Valuation
KMB's stock currently trades around 14.5x the 2023 consensus EBITDA of $3.89 billion and 13.6x the 2024 consensus of $4.16 billion.
It trades at a forward PE of 23.6x the FY24 consensus of $6.12.
It's projected to grow revenue by 2% each of the next two years. The stock has about a 3.3% yield.
It trades towards the lower end of its peer group.
It's trading at premium to where it historically has traded for the past several years.
Conclusion
KMB put up solid Q1 results and raised its guidance this week, as price increases offset volume declines and led to margin expansion. It now sees its operating profit to be up low double digits versus prior guidance of up mid to high single digits. That's a solid performance against the current backdrop, and similar to what we saw earlier from PG when it reported its results.
KMB and others in the space are clearly benefiting from price increases, which are outpacing volume declines. These names are usually considered safe havens during periods of economic weakness, and on that front, their performance reflects their reputation.
That said, despite the solid results, I view KMB more as a "Hold." It's trading above its historical valuation, and given current high interest rates, I believe KMB and others in the space should probably trade at a lower historical multiple than when interest rates were low. The reason is that these are predictable businesses, but their cost of capital is now higher, which should result in a lower valuation.
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Kimberly-Clark Is Performing Well, But Looks Fully Valued