Kimberly-Clark: 6 Themes to Watch for the Rest of the Year

Kimberly-Clark completed its first quarter with mixed results. Here are six themes to keep an eye on for the remainder of 2014.

Apr 26, 2014 at 6:00PM

Earlier this year, I singled out Kimberly-Clark (NYSE:KMB) as a stock that would likely outperform the S&P 500 index, especially should the broader market decline. I also praised the company's concentrated business model, in which it benefits from a narrower business focus than some of its larger consumer goods peers. KMB's first quarter of 2014, reported this week, seemed a middling result: The company managed to increase net income by 1.3% against a one percent decrease in sales. Organic sales for the period rose 4% versus the prior year. Reviewing a few themes from these earlier two articles in light of the company's first quarter earnings may illuminate Kimberly-Clark's direction for the rest of the year. 

Competition still a concern
In a refreshingly open moment during the company's fourth-quarter 2013 earnings conference call back in January, CEO Tom Falk discussed competitors with candor. While he mentioned a number of aggressive peers, from Georgia Pacific to Japanese conglomerate Unicharm, in the intervening months, it appears that mammoth nemesis Procter & Gamble gained the most ground competitively. On Monday's earnings call, Falk noted that one of its most significant brands, Huggies diapers, lost a couple of points of market share to P&G's Luvs diapers during the quarter. Two days later on its earnings call, P&G touted that it had gained two points of market share in its own baby-care business, stating: "This has led to our largest market share in the past 20 years, enabling us to retake market leadership from Kimberly-Clark." 

The BRICs buy diapers
One place KMB may look to fight back is in the BRIC countries. Organic sales in diapers increased 15% in Brazil, 25% in Russia, and 30% in China. Kimberly-Clark has shifted around its baby care concentration recently, lessening its exposure in slower-birth countries in Central and Western Europe, and focusing more on high-birth-rate countries in emerging markets. We can wager that next quarter's baby care numbers within the "Personal Care" business segment will also be strong, as KMB wants to wrest market share back from P&G, and because it makes rational business sense to allocate resources where sales are manically outpacing the company's overall growth rate.

Checking in on the "FORCE to Inputs" ratio
"FORCE" is Kimberly-Clark's successful cost-cutting program, an acronym for "Focused on Reducing Costs Everywhere." It's useful to compare FORCE savings to input cost inflation (the increase in price for the raw materials Kimberly-Clark uses to manufacture its products). By doing so we get a thumbnail measure with which we can understand the company's ability to absorb cost increases through trimming operations and productivity improvements. 

At the end of 2013, FORCE savings totaled $310 million, versus input cost inflation of $205 million. The ratio of savings to inflation thus stood at a healthy 1.5 times. At the end of the first quarter of 2014, the company realized FORCE savings of $70 million, versus cost inflation of $65 million, bringing the ratio down to 1.08, or almost 1-to-1.

While inflation and cost-cutting produced uncomfortably close effects in the first quarter, management's outlook for the rest of the year is more in line with 2013. The company expects to achieve total FORCE savings of $300 million, and it expects to see cost inflation in the upper half of the $150 to $250 million range. Using a conservative number of $225 million for cost inflation, the FORCE-to-inputs ratio should land somewhere around 1.33, which is not quite as stellar as last year, but still good enough for the company to manage the projected decrease in its raw materials purchasing power.

The Mexican connection
One boost KMB receives every quarter is its return on equity investments. This is led by the company's 48% stake in Kimberly-Clark de Mexico. In the first quarter of last year, income from equity investments was equal to 10.6% of all other net income. This number declined to 8.5% in the first quarter of 2014. The decline is partly attributable to unfavorable currency exchange rates, but CEO Falk also mentioned on Monday's call a slowdown in the general Mexican economy, as well as tougher local competition. While Falk expressed confidence in Kimberly-Clark de Mexico's ability to execute given tough conditions, investors will want to monitor the "share of net income of equity companies" line of the income statement carefully for the next three quarters.

Cash flow loses its edge temporarily
Cash flow in the first three months of the year was substantially lower than the prior year's quarter. KMB generated only $437 million of cash from operations in Q1 2013, versus $607 million in the prior year. The fall-off was due primarily to higher working capital requirements and a $101 million increase in pension contributions. According to management, pension contributions were substantially completed last quarter and thus won't produce the same drag on operating cash, indicating more fluid cash flow in the next three fiscal quarters.

A final theme: the mirror
My thesis from earlier this year, that Kimberly-Clark will shine in a negative market because of its narrower business focus versus larger competitors, still appears to hold, even though the market has so far managed to stay above water after a difficult start to the year. In the first week of February, I noted how symmetrical KMB's chart was versus the S&P 500 Index, implying that the stock was being favored by defensive investors:

KMB Chart

KMB data by YCharts.

While both have recovered since then, even in an upward trending channel, KMB continues to provide a rough mirror image of the broader index. And it's still outpacing the index, albeit by a smaller margin than before:

KMB Chart

KMB data by YCharts

What's the visual gist here? KMB is it still primed to accumulate the funds of defensive investors should the market buckle. And if the company can show progress on the themes I've outlined here, it will rise in a positive market environment as well.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers