Consumer products giant Kimberly Clark (KMB -0.71%) has wrapped up another successful quarter. The company notched solid organic growth in both revenue and earnings. Its results were negatively affected by unfavorable currency fluctuations, but the underlying business is doing very well. As a result, its stock has also done well. Shares of Kimberly Clark are up about 8% since the beginning of the year. The big question, of course, is whether the gains can continue. Here are a few reasons why Kimberly Clark's stock might keep grinding higher.
Diapers are selling like hotcakes in emerging markets
Kimberly Clark has largely reached the saturation point in developed markets such as the United States. But that does not mean the company is out of growth avenues; instead, the opportunity remains in emerging markets. Last quarter, the company's overall organic sales, which strip out the effects of currency fluctuations, grew 4%. K-C International led the way with 10% organic sales growth.
Kimberly Clark's diapers are selling extremely well in the emerging markets, through its Huggies brand. Last quarter, diaper sales soared 25% in both China and Russia, and increased 10% in Brazil. The emerging markets have been the major cause of Kimberly Clark's growth this year from a geographic perspective, and that is likely to remain the case for the foreseeable future.
Kimberly Clark's results were better than those of its biggest competitor, consumer staples behemoth Procter & Gamble (PG -0.69%), due to its success in the emerging markets. P&G's organic sales rose just 2% last quarter, mostly because the company's sales volumes were flat in developing nations.
As a result, it's clear that the BRIC nations, the term coined to describe the premier emerging economies [the final of the four being India], will be a major catalyst for Kimberly Clark's future growth trajectory.
Lots of cash coming to shareholders
Kimberly Clark's key strategic initiative over the past year has been its planned spinoff of its Halyard Health business, which houses the company's medical devices and infection prevention products. Halyard Health generates $1.7 billion in sales per year, and its products are sold in more than 100 countries across the globe. This tax-free transaction should close later this year.
The motivation for this initiative is to create value for shareholders. Kimberly Clark believes separating its faster-growing health care division will allow it to earn a higher valuation as an independently traded stock.
Kimberly Clark's existing shareholders will benefit not just from the spinoff, but also because the parent company just received a large cash payment from Halyard Health that it will use to repurchase shares. Management has set its share buyback authorization to $2 billion for this year, which is up significantly from its previous target of $1.3 billion-$1.5 billion.
Margin expansion in full FORCE
Kimberly Clark's second major strategic initiative is to cut costs. In response to rising pulp costs that threatened to erode profit margins, the company began a substantial cost-savings plan called FORCE, which stands for "Focused On Reducing Costs Everywhere." This has involved lower general and administrative spending, including job reductions, and has helped to keep profits high. In fact, the company realized $100 million worth of cost savings just last quarter. Profit margin stayed steady in the quarter, reflecting the benefits of these cost cuts to the company in the face of rising input inflation.
Kimberly Clark is growing sales and profits this year, and its stock price is climbing in tandem. The consumer products giant has a broad product portfolio, and its goods are selling particularly well in underdeveloped markets. Possible catalysts for future returns could be the company's ongoing cost-cutting program, as well as the impending spinoff of the health care business.
Kimberly Clark has registered solid gains this year that beat the returns produced by the broader market. In addition, Kimberly Clark rewards shareholders with a strong dividend and the company has raised its dividend for 32 years in a row.
