uploads/2019/09/CL-KMB.jpg

CL and KMB: Why Their Upside May Be Capped

By

Updated

  • CL and KMB stocks have outperformed the broader markets this year. However, any further upside in the stocks seems capped.
  • High valuation and average growth are likely to limit their upsides.

Shares of Colgate-Palmolive (CL) and Kimberly-Clark (KMB) have outperformed the broader market so far this year. Colgate-Palmolive and Kimberly-Clark have risen 25.8% and 25.2%, respectively, YTD (year-to-date) as of September 4. In comparison, the S&P 500 is up 17.2% YTD.

Part of this growth has resulted from the rise in consumer demand driven by a low unemployment rate and higher wages. Consumer stocks have looked like a viable investment option amid fears of an economic slowdown stemming from the US-China trade war.

Higher pricing, innovative product launches, and cost savings supported the companies’ base businesses and, in turn, their stocks. For instance, Colgate-Palmolive’s organic sales rose 3% and 4% in the first two quarters of 2019, respectively. Meanwhile, its gross margin, which was low in the past several quarters, also improved. Management stated that higher pricing and volumes and cost savings drove its underlying sales and margins.

As for Kimberly-Clark, its organic sales rose 3% and 5%, respectively, in the first two quarters. The company also exceeded analysts’ EPS expectations in the first half of 2019. Higher pricing, a favorable mix, and cost savings supported Kimberly-Clark’s core business and, in turn, its stock.

Besides their improved financial performances, both companies continued to boost shareholder returns via higher dividends and share buybacks.

We expect gradual price increases, cost savings, and innovations to continue driving these companies’ base businesses. However, their upside seems capped. Both companies are trading at high valuations thanks to the rises in their stock prices. However, analysts’ consensus estimates indicate average growth for them in the coming quarters, which makes their valuations unattractive.

Why CL’s growth is unlikely to impress

Colgate-Palmolive expects to sustain momentum in its base business. The company expects its organic sales to increase by 2%–4% in 2019. Higher pricing, innovations, and brand investments are likely to support its organic sales. Moreover, the company is expanding its skincare portfolio through acquisitions.

While we expect the company to benefit from higher pricing and cost savings, currency headwinds are likely to hurt its top line growth. Wall Street expects Colgate-Palmolive’s top line to mark low-single-digit growth in the back half of 2019. Moreover, analysts expect the company’s net sales to grow at a low-single-digit rate in 2020.

While CL’s sales growth looks average, its bottom line could decline in the near term. Higher overhead costs and increased investment in marketing are likely to take a toll on its bottom line, which has declined in the past four consecutive quarters.

Wall Street expects Colgate-Palmolive’s bottom line to return to growth in 2020 and mark mid- to high-single-digit growth. Colgate-Palmolive will be up against easy YoY (year-over-year) comps in 2020, which is likely to drive this growth.

What analysts expect for KMB

Analysts expect Kimberly-Clark’s top line to benefit from higher pricing and a favorable mix. However, currency headwinds and heightened competition are likely to restrict its sales growth rate. Analysts’ consensus estimate indicates that they expect KMB’s top line to grow at a low-single-digit rate in the coming quarters, which isn’t impressive.

The company’s bottom line is likely to benefit from higher pricing, cost savings, and buybacks. Analysts expect Kimberly-Clark’s bottom line to mark mid-single-digit growth in the second half of 2019. They expect its EPS to grow at a mid- to high-single-digit rate in 2020.

CL and KMB: Unattractive valuations

CL is trading at 26.4 times its 2019 estimated EPS of $2.84, which looks expensive based on its projected EPS decline of 4%. Moreover, the stock is trading at 24.7 times its 2020 estimated EPS of $3.03, which also looks unattractive based on its projected growth of about 7% in the period.

As for KMB, it’s trading at 20.9 times its 2019 estimated EPS of $6.82 and 19.8 times its 2020 estimated EPS of $7.20. Both levels seem expensive based on its projected growth rates of 3% and 6%, respectively, in the periods.

We believe that the positives are already priced into CL and KMB stocks. Moreover, analysts’ average growth forecasts imply that their upsides could be limited.

Target price indicates a slight decline

Most analysts covering CL and KMB maintain neutral stances. Moreover, analysts have a target price of $74.10 on CL, indicating a potential downside of 1% based on its closing price of $74.87 on September 4.

As for KMB, Wall Street has a target price of $139.13, indicating a potential downside of 2.5% based on its closing price of $142.68 on September 4.

More From Market Realist