Kimberly-Clark Stock: Slight Improvement In Margins Isn’t Enough, Sell (NYSE:KMB)

Great brands don’t always produce great investments. The best consumer companies to invest in usually combine good management and premium brands, but investors still need growth to find value in the long-term, how strong existing sales are.

Kimberly-Clark (NYSE:KMB) has gone on a nice run since the company’s decent last earnings report, but the stock has still gone nowhere over the last 3 years.

Kimberly-Clark is a leading consumer company that controls many leading consumer brands such as Huggies, Kleenex, Scott, and Cottonelle. Most of the company’s revenues come from the personal care division.

Kimberly-Clark recently reported net sales of $5.1 billion in the third quarter and organic sales growth of 5%. The company’s net sales year-over-year were up 1%, and margins were up to 9.24% from 8.63% last quarter. Still, the company earned less income per share this year than last year, and Kimberly-Clark also has not been able to grow revenues since 2020 either. Management recently reported income for the last quarter of 2022 of $1.38 a share. The company earned $1.39 a share in net income during the third quarter of last year.

The two main issues that Kimberly-Clark has faced over the last several years are higher costs and currency pressures from a rising dollar. Management has been able to use the company’s strong brands to rise prices at the time, but Kimberly-Clark has not been able to offset the rising costs that have hurt this leading consumer name significantly over the last 2 years. From 2016 to 2020 Kimberly Clark’s margins ranged from 9 to 14.77%. The company’s margins averaged nearly 12% during that 4-year period. This company has still not seen margins come close to recovering since costs began to rise significantly in early 2021.

This company’s net margins are still at the low end of the recent range at 9.24%, again showing the limits of management’s pricing power. Kimberly-Clark has not been able to offset the significant inflation that started in March of 2021, and the impact of those rising costs on the company’s margins continues. Management did report solid organic sales growth last quarter, but the company’s margins remain at the low end of the historical range, show that even with a number of premium brands management has to keep prices too low to maintain and grow market share in the very competitive consumer divisions this company competes in. Forex moves remain a problem for Kimberly-Clark right now as well.

The rising dollar has hurt Kimberly-Clark significantly over the last year. Forex moves resulted in the company’s earnings to be lower by 4% over the last quarter, which is the main reason why management reported no income increase on a quarter-to-quarter or year-to-year basis, despite the company reporting strong organic sales growth. Kimberly-Clark gets nearly 45% of the company’s sales and 35% of the company’s operating profit from outside of the United States. The dollar has recently pulled back against the Euro and other major currencies, but the US economy remains much stronger than economies around the rest of the world, and spending in the US should be lower in the immediate future with the Republicans being controlling the House of Representatives. The dollar is likely to continue to rise against the Euro and most major currencies for some time.

Kimberly-Clark is also not a cheap stock. This company trades at nearly 24x forward earnings estimates, 2.28x forward sales, and nearly 17x forward cash flow. The average valuation for companies in this consumer sector is nearly 20x forward earnings, 1.17x forward sales, and 15x forward cash flow. This company also trades at a premium to the average 5-year valuation as well.

Kimberly-Clark controls some of the best and most well-known brands in the personal care industry. Still, this company has been hurt more by rising costs than other companies such as Procter & Gamble. Management has not been able to offset inflationary pressures or a rising dollar with price increases, and even though the company has seen margins rise slightly over the last quarter, the supply chain and labor shortage issues driving prices higher are likely to continue to hurt Kimberly Clark’s earnings and margins for some time. The rising dollar will likely continue to put pressure on the company’s earnings as well. While Kimberly-Clark has some of the best brands in the industry, this company is not driving enough growth to justify current valuation levels in this kind of difficult operating environment.