Premiumization And Margin Expansion Will Offset Slower Diaper Demand Over Time

Catalysts

About Kimberly-Clark

Kimberly-Clark is a global consumer products company focused on personal care and tissue brands across diapers, adult care, and essential household categories.

What are the underlying business or industry changes driving this perspective?

• While the company is sustaining volume plus mix-led growth through innovation across the good, better, best ladder, intensifying competition from private label and low-cost imports in core diaper markets could cap pricing power and limit revenue growth as consumers remain value focused.
• Although digital and club channels are driving nearly all incremental North America growth, the heavy skew toward these channels, which are more promotionally intense and price transparent, may pressure net sales realization and constrain operating margin expansion.
• Despite a robust pipeline of diaper and personal care innovations that support premiumization, structurally low birth rates and flattish diaper category volumes in mature markets could increasingly force the company to rely on share gains rather than category growth to sustain earnings momentum.
• While the IFP joint venture with Suzano should reduce fiber cost volatility over time, the associated stranded cost mitigation and loss of discontinued operations income may dilute earnings growth and delay progress toward the upper end of long-term EPS targets.
• Although integrated margin management and productivity programs are moving gross margin toward the 40 percent milestone, rising tariffs, commodity cost uncertainty, and stepped-up marketing investment behind innovation could slow net margin improvement relative to the pace implied by recent quarters.

Assumptions

This narrative explores a more pessimistic perspective on Kimberly-Clark compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Kimberly-Clark's revenue will decrease by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.0% today to 15.7% in 3 years time.
• The bearish analysts expect earnings to reach $2.8 billion (and earnings per share of $8.08) by about December 2028, up from $2.0 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $6.1 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.4x on those 2028 earnings, down from 17.4x today. This future PE is lower than the current PE for the US Household Products industry at 17.4x.
• The bearish analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Innovation-led premiumization in diapers and other personal care categories, including a growing ultra premium segment and successful launches like HuggFit 360 and upgraded Snug and Dry, could sustain above category growth and support a higher long term valuation multiple. This could drive revenue and earnings higher than expected and put upward pressure on the share price and earnings.
• Structural mix shifts toward faster growing digital and club channels, where Kimberly-Clark reports significantly higher share and double digit growth, may lead to sustained volume plus mix gains that are underappreciated in consensus models. This could boost long run revenue growth and operating margins.
• Execution on integrated margin management, productivity programs and mitigation of fiber and tariff volatility through the Suzano joint venture and risk management initiatives could enable the company to reach its 40 percent gross margin and 18 to 20 percent operating margin targets before the end of the decade. This could structurally lift net margins and earnings.
• If organic sales continue to grow at or ahead of the roughly 2 percent category growth that management targets, and the company uses joint venture proceeds for share buybacks while equity income from the IFP structure steps up, diluted share count could fall and EPS from continuing operations could compound faster than revenue. This could support long term earnings growth and a higher share price.
• Greater resilience of essential categories like diapers and personal care amid consumer pressure, combined with Kimberly-Clark’s ability to balance value offerings with premium products across the good, better, best ladder, may sustain volume and share gains even in a challenging macro backdrop. This could drive steadier revenue growth and support a rerating of the stock and higher earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Kimberly-Clark is $100.0, which represents up to two standard deviations below the consensus price target of $127.73. This valuation is based on what can be assumed as the expectations of Kimberly-Clark's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $162.0, and the most bearish reporting a price target of just $100.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $18.1 billion, earnings will come to $2.8 billion, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $103.14, the analyst price target of $100.0 is 3.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.