We reaffirm our Neutral recommendation on Kimberly-Clark Corporation (KMB) following the appraisal of its third quarter 2012 results. The global supplier of health and hygiene products posted robust earnings boosted by organic sales growth, cost savings and reduced commodity costs. However, global macroeconomic environment and foreign currency translations remain a significant overhang.
Why the Reiteration?
Kimberly-Clark posted healthy third quarter 2012 earnings of $1.34 per share, beating the Zacks Consensus Estimate by 1.5% and the prior-year quarter’s earnings by 6.4%. Bottom-line growth was boosted by organic sales growth of 3% driven by volume growth, improved pricing and strong performance internationally. Organic sales growth and cost savings from the Kimberly-Clark’s FORCE (Focused On Reducing Costs Everywhere) program drove the operating profit.
However, total sales declined 3% to $5.2 billion in third quarter 2012, slightly lagging the Zacks Consensus Estimate by 2.2%. Unfavorable foreign currency fluctuations offset the increase in sales volume and higher net selling prices.
Kimberly-Clark also raised its expectation of adjusted earnings for full year 2012 to the range of $5.15 to $5.25 from the previous guidance of $5.05 to $5.20 per share. Earnings per share are expected to grow 7% to 9% from the prior-year levels. The company raised the guidance as it expects stronger organic sales growth, better cost savings, and reduced input cost in the upcoming quarters.
Overall, we are encouraged by the company’s leadership position in several consumer product categories including diapers, paper goods, health care products, and female personal care. Moreover, Kimberly-Clark focuses on improving its products through innovation in order to remain competitive and drive growth.
Kimberly-Clark is also well-positioned overseas and derives almost half of its revenues from outside the U.S. The company has been investing in key emerging markets through K-C International (‘KCI’), which includes businesses in Asia, Latin America, the Middle East, Eastern Europe and Africa, with a particular emphasis on China, Brazil, India and Russia.
Moreover, we are optimistic about the company’s restructuring program as it improves underlying profitability and return on invested capital of its consumer tissue and K-C Professional segments, which have been facing declining profits for many years. Further, management’s initiatives to control costs through its FORCE program bode well for future operating performance.
Further, the company will be exiting the diaper category in Western and Central Europe, with the exception of the Italian market and will be divesting or exiting some lower-margin businesses in certain markets, mostly in the consumer tissue segment in order to improve underlying profitability and focus its resources on its strongest market positions and growth opportunities. The company will also streamline its European manufacturing footprint and administrative organization to align its cost structure with these strategic decisions.
However, the company has been hit hard by sluggish U.S. economy, debt crisis in Europe and volatility in input costs. The company is also facing unprecedented volatility in the global commodity, currency, and financial markets due to its exposure in the international markets. The company expects economic conditions to remain volatile during 2013.
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