Kimberly-Clark (KMB) will likely report its second-quarter results before the markets open on July 23. We expect the company’s sales and earnings to stay muted. Negative currency rates and cost headwinds will likely hurt Kimberly-Clark’s sales and earnings growth rate. However, investors should focus on management’s commentary about the margins. We would like to see balanced growth in the company’s pricing and volumes, which will support its stock.
Kimberly-Clark’s margins will likely improve in the second half of 2019, which reflects lower pulp costs and increased pricing. The margins might decline in the second quarter. Lower margins would reflect cost headwinds. However, the rate of decline will likely moderate.
We expect Kimberly-Clark’s organic sales to continue to gain from higher net pricing and a favorable mix. However, higher pricing could impact the volumes, which is a concern. Meanwhile, the company’s earnings are expected to return to growth. The growth reflects strength in the base business, cost-savings, and share repurchases. However, a higher effective tax rate will likely restrict Kimberly-Clark’s second-quarter earnings growth rate.
Will Kimberly-Clark continue to beat the sales estimate?
Kimberly-Clark beat analysts’ sales estimate in the past three quarters. The base business was strong due to pricing, innovation, and investments in brands. We expect Kimberly-Clark to sustain the momentum in the second quarter as well.
Notably, higher net pricing is driving personal care and household manufacturers’ organic sales growth. Procter & Gamble beat analysts’ sales estimate during the last reported quarter due to the 5% increase in organic sales. The company had balanced pricing and volumes. Colgate-Palmolive’s organic sales rose 3% during the last reported quarter due to a 2% increase in pricing.
While we expect higher pricing to support Kimberly-Clark’s organic sales growth, it could hurt the volumes amid heightened competitive activity. In China, organic sales registered a high-single-digit decline during the last reported quarter. For Kimberly-Clark, peers’ lower prices impacted Huggies Diapers’ sales. Meanwhile, lower birth rates in South Korea and weakness in personal care growth in Brazil will likely hurt the sales.
However, we expect innovation and brand investments to drive the volumes growth in the personal care category in North America. Higher pricing in developed and emerging markets will likely drive organic sales growth.
Eastern Europe is expected to benefit from balanced growth in volumes and selling prices. Innovation-led products and marketing support could drive organic volumes. Meanwhile, in southeast Asia, organic sales will likely benefit from strength in Huggies Diapers in Vietnam.
Gross margin outlook
We expect Kimberly-Clark’s gross margin to stay low in the second quarter. Input cost headwinds will likely hurt the adjusted gross margin rate. However, the gross margin’s decline rate is expected to moderate sequentially. In the previous quarter, Kimberly-Clark’s gross margin showed a steep sequential improvement. The company’s first-quarter margins fell by 30 basis points compared to a fall by 260 basis points in the fourth quarter.
Management expects higher net price realization and cost-savings to support its gross margin rate. Moreover, a decline in pulp, recycled fiber, and polymer costs are expected to drive the company’s margins in the coming quarters. We expect a sequential improvement in the gross margin to support the operating margins. Overall, the impact of negative currency rates is expected to moderate.
Earnings could return to growth
Cost headwinds and a higher effective tax rate impacted Kimberly-Clark’s bottom line. According to the company’s management, the tax rate had a negative impact of about 2% on the adjusted EPS in the first quarter.
The tax rate is expected to remain high. The tax rate could hurt Kimberly-Clark’s second-quarter adjusted EPS. However, the company’s bottom line will likely return to growth due to share repurchases. Cost-savings and a sequential decline in input costs will probably support the company’s second-quarter earnings.
A planned increase in advertising expenses and unfavorable currency exchange rates could impact the company’s operating income and EPS growth rate.
On Wednesday, a few analysts increased their target price on Kimberly-Clark stock. J.P. Morgan increased its target price to $151 from $143 due to benefits from higher net pricing and moderation in input costs. Meanwhile, Wells Fargo raised its target price to $128 from $120.
We expect higher pricing and lower input costs to support Kimberly-Clark’s organic sales growth and margins in the coming quarters. However, we’re concerned about weak volumes following price increases. We would like to see balanced volume growth and pricing. So far, Kimberly-Clark stock has risen 21.1% this year.
Most of the analysts still recommend a “hold” on Kimberly-Clark stock. The consensus target price of $128.64 indicates a downside of 6.8% based on the closing price of $138.03 on Wednesday.