Kimberly Stuck on $65 as Inflation Gnaws on Profits

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Kimberly-Clark ( KMB ) released its Q2 earnings earlier this week and confirmed some concerns of ours. The company managed 3% organic growth, 2% due to volume growth and 1% from prices. The company also reported a 5% favorable foreign exchange effects for a headline number. Kimberly-Clark competes with the other the leading player in tissue products, Procter & Gamble ( PG ) apart from innumerable local players and supermarket private labels.

We have updated our estimates for Kimberly-Clark with a $65.30 Trefis price estimate of its stock , which is still at roughly 2% discount to its current market price. We look at what we can expect for the remainder of 2011 below.

1. Inflation could cool-off towards the end of the year

Although oil prices have somewhat moderated over the last three months, the costs have continued to rise for some of the critical inputs such as polymer resin, superabsorbent, adhesives and packaging material. Due to stringent measures by central banks to check inflation, we expect inflation to cool off towards the end of the year and in such as event, the margins could expand moderately.

2. More price hikes

In March, Kimberly-Clark had proposed price hikes in North America in the range of 3%- 7% in baby care and around 7% for consumer tissues to be impacted in the second and third quarters of the current fiscal. See Price hikes Won't Help Kimberly-Clark's Stock .

Given the Q2 results and the sheer magnitude of cost-inflation, we do not rule out Kimberly-Clark impacting price hikes outside North America as well. However, the price-conscious consumer in the emerging markets can still expect stable prices, at least in the next two quarters.

3. Further outsourcing

In addition to the cost cutting and restructuring initiatives currently underway, given Kimberly-Clark's vulnerability to prices of pulp and paper, which go into most of its products, it might be wise to explore further outsourcing options of operations especially in geographies outside the U.S.

This will help keep a check on raw material costs and also reduce overhead costs associated with management and administrative expenses, which currently strains Kimberly-Clark's operating margins. A possible scenario includes Kimberly-Clark outsourcing branded products in geographies outside the U.S., thereby reducing the costs associated with maintaining the company's own manufacturing footprint.

View our detailed analysis for Kimberly-Clark here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: KMB , PG

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