In the last year, shares of Kimberly-Clark (KMB) are up 21% and have significantly outperformed the S&P 500, as skittish investors look for a safe place to hide. If the company misses the second quarter as badly as the first, it will be time for investors to get out the Kleenex.
KMB reports its second quarter on Jul. 25. Investors who recently bought the stock are hoping for a better 2Q report. The first quarter was disappointing.
First-quarter earnings were $1.53, $0.02 ahead of the consensus estimate, but organic sales were the big disappointment in the quarter. The EPS beat was mostly due to a lower tax rate. In fact, the tax rate was 320 basis points lower than expected, and that alone contributed $0.07 to earnings.
Management said organic sales increased 2%, which was well short of the 4.4% analysts had forecast. The slowdown in sales was the slowest growth in five years. Gross margins jumped 100 basis points to 36.6%. Operating margin increased 90 basis points to 18.3%, 50 basis points less than expected. Net income was $555 million.
Because of the weak 1Q, analysts had to chop second quarter estimates. I think KMB will earn $1.48 on $4.73 billion in revenue. Fiscal 2016 sales are likely to be down 1% to $18.4 billion. The company should earn about $6.05 for the year. This compares to management's guidance of $5.95 to $6.15.
Operating margins are expected to widen to 22.4% in 2016 from 21.3% in 2015, reflecting acceleration in savings from restructuring efforts following the spinoff of Kimberley's healthcare business.
The problem with Kimberley-Clark is valuation. Even if the company earns $6.15 this year, driven by a lower tax rate and a $900 million stock buyback, at the current quote the stock is trading at 22x this year's estimates and 20x next year's estimate of $6.57. Historically, KMB trades around 15x forward estimates so the valuation is pretty lofty. If Kimberley turns in a second quarter similar to the first, at this valuation, investors will need a diaper change.
At the time of publication, Laudani had no positions in the stocks mentioned.