Kimberly-Clark’s Valuation Looks Cheap, but Challenges Persist



Valuation at multiyear low

Kimberly-Clark (KMB) stock was trading at a forward PE multiple of 14.7x as of June 20, ~23.0% below its four-year average multiple of 19.0x. Kimberly-Clark stock is also trading at a significant discount (roughly 27.0%) to its peer average of 20.2x.

Besides its low valuation multiple, Kimberly-Clark stock offers a healthy dividend yield of 3.9%, which makes it attractive at first glance. However, near-term sales and margin headwinds are expected to hurt the company’s growth rate.

On June 20, the stocks of Church & Dwight (CHD), the Clorox Company (CLX), Colgate-Palmolive (CL), and Procter & Gamble (PG) were trading at forward PEs of 22.1x, 21.1x, 19.9x, and 17.6x, respectively. Meanwhile, the S&P 500 Index (SPY) was trading at a forward PE of 17.4x.

Near-term challenges to mar growth rate

Kimberly-Clark’s management expects its adjusted earnings to register a YoY (year-over-year) rise of 11.0%–16.0% in 2018. Meanwhile, analysts expect the company to report a rise of ~10.7% in its bottom line. Share repurchases, lower interest expenses, and a significant decline in the effective tax rate are expected to drive the company’s bottom line growth.

However, challenges on the sales front, such as increased competitive activity, promotional spending, and low birth rates in South Korea, are expected to remain a drag. Also, higher raw materials prices and increased logistics costs are expected to take a toll on the company’s margins and, in turn, its bottom line. Moreover, the rate of growth of its EPS is projected to slow down to 5.2% in 2019.

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