Kimberly-Clark Proves the Best Offense is a Good Defensive Stock

Key Points

• Kimberly-Clark is one of the world’s largest manufacturers of essential personal care and hygiene products with household brands including Kleenex, Huggies, Cottonelle, and Scott.
• Kimberly-Clark shares are outperforming the consumer staples sector, S&P 500 and Apple Inc. trading up 11.3% versus 4.94%, 6.93% and down 12% YTD, respectively.
• Kimberly-Clark experienced its first YoY revenue decline since the first quarter of 2021. Still, most of it was forex headwinds as organic sales grew 6% YoY, driven by 4% price increases, 1% favorable product mix, and 1% volume increases.

Kimberly-Clark Co. NYSE: KMB is a worldwide leader in personal care and essential hygiene products. Chances are high that you've got any number of their products in your bathroom. Kimberly-Clark brands include Kleenex, Kotex, Huggies, Scott, Cottonelle, Wypall, Poise and Depend. While the pandemic shot up boring but essential household stocks like Proctor & Gamble Co. NYSE: PG, The Clorox Co. NYSE: CLX and Church & Dwight Co. Inc. NYSE: CHD, makers of Arm & Hammer, they've managed to digest normalization and still outperform the S&P 500 index. Stockpilers may have driven up the demand for their products during the pandemic, but the volume usage is part of the new normal.

Tissues Outperforming iPhones   

The rule of thumb for investors is to buy defensive stocks in the consumer staples sector during risk-off periods to offset volatility. Defensive stocks are meant to help minimize losses, not so much to make gains. However, Kimberly Clark breaks the mold, no pun intended. KMB shares are trading up 11.3% year-to-date (YTD), outperforming the consumer staples sector and the S&P 500, which are up 4.94% and 6.93% YTD, respectively. Comparatively, tissues are (vastly) outperforming iPhones when you compare KMB to Apple Inc. NASDAQ: AAPL stock, which is down 12% YTD.

Daily Cup Pattern

The KMB daily candlestick chart illustrates a cup pattern. The cup lip line formed at $138.16 on July 24, 2024, as shares fell to a low of $116.32. A rounding bottom formed and eventually staged a rally back up towards $129.05 heading into the Q1 2024 earnings release. The stellar earnings performance triggered a gap up to the $134.98 level as shares peaked at $139.75. The daily relative strength index (RSI) surged to the 80-band and has since peaked to pull back just under the overbought 70-band. Pullback support levels are at $132.79, $129.04, $125.27 and $122.05.

Wiping Out the Estimates

Kimberly-Clark reported Q1 2024 EPS of $2.01, beating consensus estimates for $1.63 by 38 cents. Revenues fell 0.9% YoY to $5.15 billion, beating $5.08 billion consensus estimates. Revenues were impacted by nearly 5% from forex and 1% from divesting the Tissue and K-C Professional business in Brazil in June 2023. Organic sales rose 6%, driven by a 4% increase in price. Gross margins rose 390 bps to 37.1%.

North American organic sales rose 3%, driven by 2% growth in Personal Care and 6% growth in Consumer Tissue. Developing and Emerging (D&E) markets experienced 15% organic growth due to pricing and volume gains. Personal Care saw organic sales rise 10% YoY, driven by price hikes in hyperinflationary economies as well as mix and volume gains. Consumer Tissue sales of $1.6 billion fell 2% YoY, mostly due to divestitures, while organic sales rose 6% in North America. However, this was offset by lower pricing in Western Europe due to energy surcharges.

Raised Guidance

Kimberly-Clark raised its organic net sales guidance to mid-single digits versus earlier guidance of low to mid-single-digit growth. Reported net sales are expected to be negatively impacted by 400 bps for forex and 120 bps from divestitures, up from 300 bps and 60 bps previously expected. Adjusted EPS expectations were raised to grow at low-teens, up from high-single-digit growth, which was earlier forecasted.

Upbeat CEO Commentary

Volume growth was the big upside driver as volumes went positive for the first time in two years. Productivity initiatives and procurement-related savings also pushed the bar. While the company posted its first YoY decline since the first quarter of 2021, most of it was related to forex headwinds since organic sales grew 6% YoY. The company is looking to divest some of its private label business, which will also result in a 2% cut of its global workforce in 2025.

Kimberly-Clark CEO Mike Hsu commented, "Our powerhouse pipeline of innovation drove sequentially stronger gains from volume-plus-mix. We continued our strong productivity momentum through our efforts to optimize our margin structure, and we are making good progress focusing on our enterprise as we advance the implementation of our new operating model."

Kimberly-Clark analyst forecasts and price targets can be found at MarketBeat.