Kimberly-Clark: No Clean Sheet (NYSE:KMB)

While Kimberly-Clark (NYSE:KMB) provides cleaning products and tissues to consumers across the globe, it is its investors which can use some comfort after a difficult period of time. Investors have seen a lackluster share price performance recently, driven by a higher interest rate environment.

My last take on Kimberly dates back to April 2020, when Kimberly posted a 10% increase in first quarter volumes, with the pandemic contributing to the results in the final month of the quarter. While I was no necessarily interested to see the one time boost to the business, it was a potential longer lasting demand impact which made me a bit upbeat on the business, with people requiring more towels, wipes and hygienic products.

A Former Take

In April 2020, Kimberly posted a spectacular set of quarterly results. While first quarter sales were up just 8% to $5.0 billion, the spectacular achievement was a 45% increase in net earnings to $1.92 per share, as adjusted earnings came in as high as $2.13 per share.

This marked a strong quarterly performance after Kimberly posted 2019 sales at $18.5 billion on which it posted net earnings of $2.2 billion, equal to $6.24 per share, with adjusted earnings reported at $6.89 per share. The company operated with $7.5 billion in net debt, and with EBITDA for 2019 coming in at $4.2 billion, a resulting 1.9 times leverage ratio was very manageable, after 2020 started on a spectacular note.

Kimberly traded at $135 per share ahead of the pandemic, translating in to a 19-20 times earnings multiple based on 2019 numbers, a reasonable multiple given the defensive qualities of the business, already low interest rate environment and relative solid balance sheet. The issue is that sustainable sales growth was a bit hard to come by in recent years, as well as the fact that the company has seen an increasing gap between GAAP and adjusted earnings, driven by restructuring and optimization efforts.

With shares initially spiking to $150 in March, and trading at $140 in April, I was interested given the anticipation of better days for the business, as well as lower interest rates. My real interest was to see if the growth in sales was entirely due to a hoarding effect, and if and how large and this structural growth component would be. Given this background, I proceeded with caution and did not get involved with the stock.

Steady, Then Not So Much

Since the pandemic, shares have largely traded in a $120-$150 range in the two years which followed, making me glad that I did not get involved with the stock. Worries about inflation and higher interest rates have even made that shares fell to $112 at the moment of writing, the lowest level since 2019.

In January 2021, Kimberly-Clark posted its 2020 results. In the end, full year sales rose just 4% to $19.1 billion in a bit of a deflationary environment, boosting gross margins along the way. Amidst higher marketing expenses, earnings rose 9% to $2.35 billion, with earnings up 10% to $6.87 per share. The company took the opportunity to further refine the business under its 2018 Global Restructuring Program, with adjusted earnings per share up 12% to $7.74 per share. While I am happy to adjust for one-time restructuring expenses, it should be noted that these expenses are quite recurring by now, and take a long time to deliver on tangible results.

Amidst comparables becoming more demanding, Kimberly outlined a modest guidance for 2021 which should not be a surprise, as adjusted earnings are seen between $7.75 and $8.00 per share, translating into a GAAP earnings guidance between $7.10 and $7.60 per share.

As it turned out, 2021 was indeed a challenging year, with comparables creating a tough set-up. Full year sales rose 2% to $19.4 billion, yet inflation hurt gross margins. Operating profits fell a fifth to $2.5 billion, with net earnings down 23% to $1.81 billion, as GAAP earnings actually fell by nearly a quarter to $5.35 per share.

Adjusted earnings fell to $6.18 per share as the cut in the earnings numbers is for real, driven by inflation, supply chain disruptions and deleveraging with volume trends on the retreat. This comes as the structural demand component has vanished since the outbreak of the pandemic. Net debt inched up to $8.3 billion amidst continued buybacks and dividends, as well as regular net capital spending. This makes that in combination with lower profitability, I peg EBITDA at $3.4 billion, for a 2.5 times leverage ratio.

Quite frankly, I was puzzled to see shares still trading at $140 at the start of the year after these results were reported, as the performance is utterly soft. While a 3-4% organic growth guidance for 2022 looks comforting, this is largely driven by price growth in all likelihood with earnings only set to rise to $5.60-$6.00 per share, all below the 2019 numbers.

First quarter results for this year were a mixed bag. A 7% increase in comparable sales and hike in the full year organic growth guidance to 4-6% look comforting, but this is not. This higher sales guidance is due to inflationary pressures with adjusted earnings down a quarter to $1.35 per share, as the full year earnings outlook was maintained.

Second quarter sales rose a similar 7% as the company now guides for 5-7% increase in organic sales, but the company maintained the full year earnings outlook, albeit that it warned that results likely come in at or towards the lower end of the range. With net debt inching up to $8.4 billion, while no profitability recovery is in sight, leverage remains on the high side, not allowing for much room to do something on that front.

And Now?

Based on the adjusted earnings guidance at the lower end of the range, Kimberly now trades at 21 times earnings, all while leverage is increasing quite a bit. The ridiculousness of a 4-year restructuring program now becomes clear as well, with no results shown for it.

The question is if the company can find its mojo and operating margins potential back. If history is any guidance in this, it is the past decade which does not provide much comfort as Kimberly already posted sales at $19 billion in 2012, indicating that no revenue growth was seen. Adjusted for inflation, the company has not seen any growth in the business, albeit that buybacks made that earnings and revenues per share have been on the increase. This uphill battle makes that operating margins have fallen below 15%, while a decent consumer staple should be able to post 15-20% margins.

Truth is that I think that more decisive efforts and information is needed here. Kimberly has been struggling for years, and still trades at a premium valuation multiple in excess of 20 times here. This makes me cautious, as management does not have performance on its side to claim a victory here. Perhaps some activist involvement would be welcomed, or M&A (in which Kimberly is the target), but that is guessing in such an environment. Right now, I see a richly valued name, certainly in this interest rate environment, making me cautious.