You might think that the earnings reports from a consumer products company like Kimberly-Clark (KMB) would always be boring. Kimberly-Clark is, after all, a giant company engaged in the unglamorous business of supplying paper products to consumers, and a brand well enough known that just about every house on Wall Street covers them. That kind of saturation coverage plays into the “wisdom of the crowd” aspect of earnings forecasts, and therefore usually makes for average estimates that are pretty close to the mark. Nor is there much dissension among the analysts as to the stock’s prospects: the vast majority give it a boring “hold” rating.
However, over the last year or so, KMB earnings have resulted in some big initial moves that often sparked a trend.
The fact that when they reported this morning, KMB stock dropped close to four percent in premarket trading alone shouldn’t really come as a surprise. The release is, however, noteworthy. The deeper you dig into this, the more a drop in the stock looks like a buying opportunity.
First, it was one of those reports that infuriate people who look only at the headline numbers. Kimberly-Clark beat on the bottom line with EPS of $1.54 versus a consensus estimate $1.50, and were basically in line with revenue of $5 billion versus the forecast $4.99 billion. What hurt the stock was that the revenue estimate was met not by increased sales volume but higher prices. Sales volume actually fell by seven percent in the quarter, which is a worrying number for a company that operates in a competitive market where branding is everything. The feeling of traders this morning seems to be that given the global move towards higher interest rates and the slowing effect that that is expected to have, premium brands will be struggling over the next few months.
That is obviously not good for the company, but the other two negatives cited by KMB are relevant when looked at in the light of the current situation.
The first of those was the effect of foreign exchange fluctuations, which the company estimated would have a negative impact of around 2% on operating profits. For a U.S. company that does business around the world, which KMB does, that really means the effects of dollar strength. A higher dollar means lower revenue in dollar terms from sales in other currencies. Let’s say that a box of KMB tissues sells for 2 euros. If the U.S. dollar starts out being worth 2 euros and it strengthens to where a dollar would be 4 euros, the dollar revenue from each box sold would drop from $1 to $0.50. Obviously, that is not a realistic example, but you get the point — a stronger dollar means lower revenue from overseas.
The thing is, though, earnings reports are backward-looking and, while dollar strength was evident throughout Q4 2022 as compared to the previous quarter, by the end of the year the dollar was falling. That trend that has continued into 2023.
The second negative quoted by the company was ongoing supply problems, something that also featured prominently in another disappointing release, this one from Boeing. Again, perfectly understandable during Q4, as China was in the full throes of implementing its “zero-Covid” policies, but not as relevant now. Protests in early December prompted a rethink and, by the end of the year, the restrictions had pretty much been abandoned completely. Data released last night showing a 70% drop in Covid cases in China suggest that there won’t need to be another clampdown. As China normalizes, so will the global supply chain.
Kimberly-Clark’s earnings produced a big negative response this morning, but the reasons for that drop seem questionable at best. For starters, the impact of price hikes have already been felt. History suggests that consumers will go back to their preferred brands as sticker shock fades, so a further decline in organic sales is probably less likely than a bounce back. Then there is the negative impact of forex, where the conditions that caused problems last quarter have changed, and supply issues, of which the same can be said.
Basically, the selling of KMB this morning, while understandable give the drop in sales volume and somewhat gloomy tone of the commentary contained in the report, is about conditions on average throughout Q4 of last year. However, those conditions have changed, and the somewhat “recession-proof” nature of things like diapers, toilet paper, and facial tissues and the obvious long-term outlook will continue to have appeal as long as uncertainty around the economy remains. While the market reaction to KMB’S earnings in the past may suggest a few more days of selling, a strong bounce back before too long looks likely and averaging into a long position over the next week or so should pay dividends.
* In addition to contributing here, Martin Tillier works as Head of Research at the crypto platformSmartFI.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.