Costs and pricing are still eating at Kimberly-Clark (NYSE:KMB), but before we get into those thorny issues, let's take a look at the first-quarter results.
Earnings per diluted share before unusual items were $0.93, in line with guidance, and flat with last year's $0.93 per share. Taking the unusual items (competitive improvement initiatives, which I'll refer to as restructuring charges) into account, earnings per share were $0.60. It's worth noting that both figures are aided by share repurchases. To date, these restructuring charges have totaled $437 million before taxes, and the company expects the grand total through fiscal 2008 will be somewhere between $1 billion and $1.1 billion, with the payoff being at least $350 million a year in pre-tax savings starting in 2009. While it is helpful to look at earnings per share without the restructuring charges, I recommend investors also evaluate the business with the charges included. They're real changes to the business, with an expected future payoff that should be measured.
On a brighter note, Kimberly-Clark's balance sheet remains solid, and its free cash flow is more than adequate to cover its larger-than-average 3.4% dividend yield. In the near term, as the company restructures, I consider following the balance sheet and free cash flow of the business to be just as important as tracking its progress in its restructuring efforts, raw material costs, and price increases.
Rising raw material costs continue to be a real bugaboo for Kimberly-Clark, and they're plainly evident in the 11.7% decrease in gross profit. The company is a large consumer of natural gas, oil, and polymers, which are made from oil. The company stated on its conference call that its natural gas needs are 80% hedged through the third quarter, at prices slightly higher than today. However, for polymer and other raw materials, it looks like the company will be raising prices in an attempt to pass cost increases on to customers.
If all goes well, the price increases should start to take effect in the third quarter. However, if competitors Procter & Gamble (NYSE:PG), Playtex Products (NYSE:PYX), and Georgia-Pacific don't follow suit with similar price increases, then Kimberly-Clark could find itself losing market share under continuing margin pressure.
Overall, I think Kimberly-Clark's shares are still fairly to slightly overvalued here, given that free cash flow isn't really budging. In the long term, I don't think free cash flow should grow more than 5%-8% per year. It's still a good business, with a nice 3.4% yield, but I would wait for a better valuation before plunking money down on Kimberly-Clark shares.
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Nathan Parmelee has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
