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Diapers Chafe Kimberly-Clark

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By Rex Moore (TMF Orangeblood)
April 22, 2003

Diapers and gas turned out to be a bit messy for Kimberly-Clark (NYSE: KMB) in the first quarter, causing earnings to dribble 7% lower on a year-over-year basis.

Diapers rubbed the company the wrong way because of intense pricing pressure from competitors such as Procter & Gamble (NYSE: PG). As Kimberly-Clark -- maker of such consumer brands as Huggies, Pull-Ups, Kleenex, Scott, Kotex, and Depend -- battled for market share, it was forced to implement "competitive price reductions and promotions."

Also soiling performance was the rising price of natural gas and other energy, which the company uses to manufacture its products.

In the end, however, the diaper wars are not chafing investors. Earnings were slightly above expectations, and Kimberly-Clark is maintaining its full-year profit forecast of at least $3.36 per share. Sales rose about 4%, and though they were helped along by favorable currency exchange rates, the increase also reflects 2% volume growth.  With the stock up 4% today, it seems investors were expecting worse.

The company is trading at a trailing price-earnings ratio of 15, which is about half the industry average and near a five-year low. By comparison, Procter & Gamble's P/E stands at 25.

However, while Kimberly-Clark may be worth considering in the consumer products sector, it is no relative bargain. P&G's P/E is also near a five-year low, and both trade at about 25 times trailing-12-month free cash flow... a much more accurate measure of a company's profitability.

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