Value Investors Club / KIMBERLY-CLARK CORP (KMB)

Description

Kimberly-Clark (KMB)

Short KMB

(Please see Disclaimer below)

KMB's business has benefited handsomely from Covid. Citizens stocked up on toilet paper, facial tissue, diapers, and

other personal care products in the middle of March. But that benefit is already waning as Nielsen's US 2-week Y/Y

growth data peaked at 130% in March but has decelerated considerably to just flat in July. Guess what? Adults and

babies aren't going to the bathroom more frequently due to Covid. No one is sneezing more. Sure, maybe people wash

their hands a bit more frequently and need more paper towels as a result of Covid but that product segment represents

just 9% of KMB's sales.

KMB is a Secular Short

Private label products are steadily eroding market shares amongst numerous staples companies. KMB already has the

biggest exposure to private label products amongst its Staples brethren. As a result, gross profit has not grown for KMB

in 10 years (see yellow cells below). Sell side analysts who constantly point out the fact that KMB trades at a discount to

its staples peers tend to forget to argue why that discount is unwarranted. In my opinion, it makes perfect sense.

This high private label exposure is driven by some of KMB's biggest categories: Baby Wipes, Paper Towels, Facial Tissue

and Bath Tissue.

Specifically, private label toilet tissue and paper towels are taking significant market share:

You can see all of this data laid out nicely in the charts below. KMB has been losing share for years (before even 2016 as

depicted below) as private label products take share across their product categories.

Finally, you can see that over the last year, 62% of KMB's portfolio has been losing share. Most importantly, they have

lost 76 bps of market share in toilet tissue (a no growth industry) and another 138 bps in facial tissue (also no growth).

Recent Results

KMB reported a stellar Q220 with organic growth up 4%, Gross Margins +526 bps Y/Y, and EBIT Margins +477 bps Y/Y.

EPS grew 32%. This is as good as it gets. Pantry stocking went to unseen levels in March and then KMB had to restock

shelves but pretty quickly it seems that people realize they don't need 50 rolls of toilet paper for this pandemic.

Guidance implies a huge slowdown in the back half with 2H EPS below the Street. This was a one time bump that is now

ending.

Valuation & Price Target

Gross and EBIT Margin expectations are too high: Consensus expectations have Gross Margins expanding to nearly 38%

by 2022 which would be an all-time high and 500 bps higher than where margins were in 2018. Similarly, Consensus has

EBIT margins expanding to 20% which would also be a record high and 300 bps higher than 2018. Analysts seem to think

that the company's FORCE program reduces costs and thus they predict higher gross and operating margins in the future.

But the rhetoric does not match results; the company believes that FORCE has generated savings of $3.4B over the last

10 years. And yet EBIT has grown just $450m during that timeframe. Where did the other $3.0B of savings go? To

keeping the company afloat in an ever-increasing competitive world. Annual FORCE savings do exist in a gross sense but

are eroded every year by competitive forces and that's why Gross Profit has not grown in a decade.

As a result, my Gross and EBIT margin expectations for FY22 are 100 bps lower than the Street and my EPS is 7% lower. I

estimate EPS will barely growth in '21 and '22.

My price target is $123: 17x 2021 EPS of $7.25. This is not a sexy short. My target only looks for 17% downside. But

given the low organic growth and recent relative outperformance I think this is a solid short relative to the S&P500.

Business Overview

KMB manufactures and sells personal care products in 175 countries with sales split about evenly between North

American and International markets. KMB operates in three segments:

Personal Care (50% of Sales): Diapers (Huggies), Training Pants (Pull-Ups), Baby Wipes (Huggies), Feminine Care (Kotex),

Incontinence Care (Depend).

Consumer Tissue (33% of Sales): Facial Tissue (Kleenex), Bathroom Tissue (Scott, Cottonelle), Paper Towels (Viva).

K-C Professional (17% of Sales): Facial Tissue, Bathroom Tissue and Paper Towels sold predominately to Office, Hotels,

Restaurants (any away from use business you can think of). They also have a small Safety Products business.

Their 2022 operating goals (called K-C Strategy 2022) is to grow organic sales 1-3% annually, increase EPS mid-single

digits and increase the dividend annually in line with EPS.

DISCLAIMER: The author is short KMB. This is not a recommendation to buy or sell any investment. Additionally, this document should not be relied upon to make an investment decision as the numbers and figures presented are solely the author’s estimates. Investors should contact the company directly and read KMB public filings to form their own opinions and make their own investment decisions. The author may transact in the securities of KMB without notice.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Nielsen data continues to slow due to destocking. Covid vaccine.

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			2020	2021
Price:	147.33	EPS	0	0
Shares Out. (in M):	341	P/E	0	0
Market Cap (in $M):	50,247	P/FCF	0	0
Net Debt (in $M):	6,880	EBIT	0	0
TEV (in $M):	57,127	TEV/EBIT	0	0
Borrow Cost:	General Collateral