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Will Sales and Cost Headwinds Stall the Recovery in KMB Stock?

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KMB stock has recovered since Q3 earnings

Shares of Kimberly-Clark (KMB) have increased 8.5% since the company reported better-than-expected third-quarter results on October 22. Kimberly-Clark’s third-quarter top and bottom lines came in ahead of analysts’ estimates, thanks to higher pricing, a favorable mix, a lower effective tax rate, and share repurchases.

The stock prices of other household and personal care product manufacturers—including Procter & Gamble (PG) and Clorox (CLX)—have also shown signs of recovery on the back of price increase announcements and favorable mixes.

On a year-to-date or YTD basis, Kimberly-Clark stock is down 4.3%. Meanwhile, Procter & Gamble and Clorox are up 0.9% and 11.8%, respectively. Colgate-Palmolive (CL), which has underperformed so far this year, has declined 16.2%.

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Will the recovery last?

We believe persisting challenges will hurt Kimberly-Clark’s sales and margins in the near term and, in turn, its stock price. Challenging market conditions in China, the lower birth rate in South Korea, and adverse currency rates are expected to affect the top line. Wall Street analysts expect Kimberly-Clark’s top line to decline year-over-year in the next couple of quarters.

Meanwhile, inflation in commodities and other raw material prices, coupled with increased transportation costs, are likely to hurt margins. Also, Kimberly-Clark’s tax rate is expected to be a headwind in 2019. Management expects its effective tax rate to be higher in 2019 than 2018, which could lower the EPS growth rate.

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