Kimberly-Clark Pops On Successful Price Pass-Through

Kimberly-Clark Demonstrates Resilience Of Staples Sector 

Shares of Kimberly-Clark NYSE: KMB popped in the wake of the Q1 earnings release for one reason and one reason alone, a successful price pass-through. The company’s margins were squeezed and earnings shrank but the successful pass-through of inflationary pressure points to continued strength for the company. The takeaway is that margins were compressed but not as much as expected and the outlook includes continued improvement in that regard as well as a boost in revenue. Trading at 24.5X the earnings estimate for 2022 the stock is highly-priced but you get a lot for what you pay including a healthy balance sheet, share repurchases, and a growing dividend. 

Kimberly-Clark Outperforms And Guides Higher 

Kimberly-Clark had a very solid quarter supported by strength in all units as well as higher prices. The company reported $5.1 billion in net revenue for a gain of 7.6% over last year and beat the consensus by 365 basis points. On an organic basis, sales are up 10% offsetting the impact of FX. In regards to prices, selling prices are 6% across the company with an 8% increase in personal care products. Volume and mix also helped drive top and bottom-line results rising 2% each. Sales in North America, the company’s core market, rose by 16% with double-digit gains in Baby & Child, Adult, and Feminine care products. 

Moving down to the income, gross and operating income fell double-digits on a GAAP and adjusted basis due to rising pulp costs, polymer costs, distribution, and energy costs. These were offset, however, by internal efforts to control costs as well as higher pricing to produce margins that were better than expected. On a GAAP basis, the $1.55 in EPS is down from last year’s $.172 while the adjusted $1.35 is down by 25%. The good news is that adjusted earnings beat by $0.12 or 970 basis points and allowed the company to raise its guidance. 

Kimberly-Clark execs are now expecting to see organic revenue growth of 4% to 6% compared to the previous 3% to 4% with net growth of 2% to 4%. This is an improvement but only in line with the consensus so take it with a grain of salt. The EPS outlook is similar with the $5.60 to $6.00 range bracketing the consensus but the consensus of $5.77 is closer to the low end than the top. In our view, the guidance may be cautious and additional pricing increases are expected so the odds favor outperformance and/or another increase to guidance later in the year. 

Kimberly-Clark Dividend Yield Is 3.20% 

Kimberly-Clark is a dividend grower with 49 years of increases to its credit. The payout ratio is a bit high at 80% but the cash flow is strong and earnings growth is on the table so not the red flag it could be. The yield is over 3.2%, however, and comes with a repurchase program that we see aiding upward momentum to share prices over the short, mid, and long-term. The real downside to the payout is the CAGR which isn’t high, only 4%, and it might slow further. 

The Technical Outlook: Confirms Support At Key Level 

Price action in Kimberly-Clark fell to a long-term low earlier this year but found support at that level. The price action has since popped, driven by the strong Q1 results, and confirmed the bottom of a trading range that has been in place since before the pandemic began. It is likely the price action will continue to move higher but it is also likely this highly valued stock will find resistance at the top of the range near $155.