2 Big Reasons to Sell Kimberly-Clark

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Consumer stocks are now as risky as they've ever been. Unemployment’s historically high, consumers are spooked, and subpar earnings abound, as companies pay the price for lost competitive advantage or fiscal irresponsibility. But tough times can offer investors the best chance to buy stocks. 

Even if stock prices are low, investors still need to be careful. Many companies simply won't survive the recession in their current form. And even if you believe an investment's a strong buy, it's always Foolish to play devil's advocate, probing for its potential weak spots. To keep you and your portfolio ready for anything, I've highlighted two reasons to jettison personal- and health-care company Kimberly-Clark (NYSE: KMB).

Mind the gap
In a companion article, I threw my weight behind this producer of popular consumer brands such as Kleenex, Kotex, and Huggies. Now I'm hot on the trail of company traits that you'd prefer to wrap up in a tissue and quickly discard.  

1. Paper-thin profits
Lagging profitability reigns first among the reasons to give Kimberly-Clark the ax. Not only has the company's operating margin been on a steady decline for years, but it's also fallen meaningfully behind its category peers. Just take a look at the table below.

Company	OM 06	OM 07	OM 08	OM TTM
Kimberly-Clark	15.6%	14.9%	13.5%	14.7%
Procter & Gamble (NYSE: PG)	19.4%	20.0%	20.4%	20.4%
Colgate-Palmolive (NYSE: CL)	20.4%	20.8%	20.9%	22.1%
Church & Dwight (NYSE: CHD)	13.8%	14.2%	14.9%	15.9%
Johnson & Johnson (NYSE: JNJ)	25.7%	24.9%	25.4%	26.3%
Energizer (NYSE: ENR)	15.4%	15.7%	16.1%	17.3%

Data from Capital IQ.

Perhaps the most disappointing part of this trend is that management had specifically set out to expand the operating margin in past years. But in the 2004-2008 period, shareholders were treated to an average 80-basis-point decline in operating margin (based on company-adjusted numbers), versus a targeted 40-to-50-basis-point annual improvement.

The problem? Price increases and productivity gains that drastically lagged cost inflation and increased marketing. This year, management predicts a significant margin comeback, but that's partly helped by lower commodity costs -- and one year does not reverse a five-year trend.

Meanwhile, more appealing companies such as Church & Dwight and Colgate-Palmolive were able to expand their operating margins, even during a period of rising raw material costs. Who's the weaker hand here?

2. Customers jumping ship
Recessions have a way of exposing weaknesses in a company's product mix. For a perfect illustration, look no further than Kimberly-Clark's Consumer Tissue segment, which includes facial and bathroom tissue, plus paper towels. At 35% of 2008 net sales, the business has been a major drag on results.

In 2008, North American volume declined roughly 7%, alongside a 2% slide in Europe. European consumers looked more confident in this year's second quarter, but North American volume still fell by 5%, nearly matched by almost 4% of volume weakness in developing and emerging markets.

Quite simply, when times are tough, the products with which consumers form an emotional bond hold up best. And when it comes to wiping up a mess -- whether it's spilled juice or a runny nose -- I suspect that it's not a huge loss for many consumers to part with their soft and fluffy paper goods. Truly, if you're suffering from thin-wallet syndrome, why spend money on a Kleenex travel pack, when you can just swipe a few extra napkins from McDonald's (NYSE: MCD)?

What do you think?
We've made our Foolish case on Kimberly-Clark -- now it's your turn. Do you think Kimberly-Clark's a resounding sell? A cautious buy? Share your comments below.

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