How Should You Play Kimberly-Clark Stock at a P/S Multiple of 2.2X?

Kimberly-Clark Corporation KMB is currently trading at a forward 12-month price-to-sales (P/S) ratio of 2.19, higher than the industry average of 1.29. This inflated valuation suggests that the market is pricing in high growth expectations, but it also raises questions about whether the company can deliver results that justify such a premium. KMB’s Value Score of C adds to these concerns. Image Source: Zacks Investment ResearchShares of Kimberly-Clark have tumbled 7.6% in the past three months compared with the industry’s decline of 0.9%. The personal care and consumer tissue product company trailed the broader Zacks Consumer Staples sector’s fall of 3.3% and the S&P 500's growth of 8% during the same period.Image Source: Zacks Investment ResearchWhile a high valuation and the stock's recent underperformance suggest caution, the company's Powering Care strategy and other growth initiatives may still appeal to investors.Current Challenges for Kimberly-ClarkKimberly-Clark has been battling a dynamic consumer and retail environment, which is putting pressure on its performance. Demand has softened in several key international markets, including parts of Asia and Latin America, as well as North America’s professional segment. Southeast Asia and Latin America, in particular, are experiencing a reduction in purchase frequency due to economic pressures. Declining birth rates in markets such as China and South Korea continue to impact demand for products like diapers. Kimberly-Clark’s third-quarter 2024 revenues of $4,952 million declined 4% year over year. The company attributes much of this revenue shortfall to transitory factors, including retail inventory reductions, hurricane-related disruptions and lower demand in certain international markets. However, the impact of inventory issues has proven persistent, reflecting not only supply-chain adjustments but also weakening demand in specific channels, such as the North American professional segment. These persistent headwinds raise concerns about the company’s ability to drive top-line growth in the near term. For 2024, organic net sales are now projected to grow between 3% and 4% compared to a previously anticipated mid-single-digit growth rate due to specific challenges related to changes in retail inventory levels. Apart from this, currency headwinds are likely to hurt net sales by nearly 400 basis points in 2024.The current economic environment has necessitated promotional strategies to maintain consumer demand amid high price sensitivity. Kimberly-Clark increased its advertising spend by 60 basis points in the third quarter and anticipates stepping up advertising and brand investments by at least the same amount in the fourth quarter. These rising promotional costs, alongside pressures to avoid downtrading in core categories, could limit margin expansion and compress profitability.What to Expect From KMB in Q4?Kimberly-Clark anticipates that its fourth-quarter top-line performance will closely mirror the third quarter’s. This forecast reflects a challenging consumer landscape, with noticeable slowdowns in certain markets and professional channels, coupled with the ongoing risk of retail inventory reductions, which could constrain year-over-year growth. In terms of operating profit for the fourth quarter, the company expects minimal growth. Kimberly-Clark plans to increase investments in its operations and brands, which is likely to be offset by sustained productivity savings and a decrease in Other Income and Expenses compared to the previous year.KMB’s Growth Strategy on TrackKimberly-Clark's Powering Care Strategy represents a central pillar of the company’s transformation, targeting accelerated growth, operational efficiency and enhanced organizational alignment. Through its Powering Care Strategy, Kimberly-Clark has focused on three main areas: accelerating innovation, optimizing margin structure and restructuring for growth. The strategy aims to solidify Kimberly-Clark’s position as a category leader globally by balancing investments in high-growth segments, introducing transformative innovations and driving productivity across operations.Innovation remains a core priority for Kimberly-Clark’s Powering Care strategy, and the company is actively introducing new products across all price tiers. The recent launch of Skin Essentials, with its skincare benefits, has been well-received by consumers. Kimberly-Clark’s commitment to delivering unique and higher-value products should drive premiumization, catering to evolving consumer demands while enhancing its brand strength. This innovation strategy is expected to maintain consumer loyalty and support top-line growth across key categories.With a volume-and-mix-led growth model, Kimberly-Clark prioritizes premium products that not only address evolving consumer preferences but also drive higher margins. The company’s transition to a volume-and-mix-led growth strategy is yielding results, with the third-quarter 2024 consumer offtake in North America increasing by 3.2% in both the Personal Care and Consumer Tissue categories. By prioritizing consumer demand and focusing on premium products, the company is effectively balancing top-line growth with margin protection. Moving on, Kimberly-Clark has set an ambitious productivity target of $3 billion in savings over the next few years, with $130 million achieved in the third quarter of 2024 alone. The Powering Care Strategy’s emphasis on the supply chain and operational efficiencies has been instrumental in Kimberly-Clark’s recent margin expansion, bringing the gross margin up to 37% year to date (per the third-quarter earnings call). This focus on productivity is intended to counterbalance inflationary pressures and currency fluctuations, which have impacted costs. By reducing expenses and reallocating resources to high-margin products, the company reinforces its ability to achieve its long-term margin goals, including a 40% gross margin target by 2030.Investors’ Guide to KMB StockKimberly-Clark’s elevated valuation and recent underperformance relative to peers are concerning. The company is contending with rising advertising costs and a dynamic consumer and retail environment. However, with its robust brand image and Powering Care Strategy in place, Kimberly-Clark shows potential for long-term success. Current investors should retain their positions in KMB stock, while new investors might wait for a more favorable entry point. The company currently carries a Zacks Rank #3 (Hold). Top Three Consumer Staple PicksIngredion Incorporated INGR manufactures and sells sweeteners, starches, nutrition ingredients and biomaterial solutions derived from wet milling and processing corn and other starch-based materials. The company currently sports a Zacks Rank #1 (Strong Buy). INGR has a trailing four-quarter earnings surprise of 9.5%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.The Zacks Consensus Estimate for Ingredion’s current financial year’s earnings indicates growth of 12.5% from the year-ago reported number.Freshpet Inc. FRPT manufactures, distributes and markets natural fresh meals and treats for dogs and cats. It currently carries a Zacks Rank #2 (Buy). FRPT has a trailing four-quarter earnings surprise of 144.5%, on average.The Zacks Consensus Estimate for Freshpet’s current financial-year sales and earnings indicates growth of 27.3% and 224.3%, respectively, from the prior-year reported levels.McCormick & Company MKC, which manufactures, markets and distributes spices, seasoning mixes, condiments and other flavorful products, currently carries a Zacks Rank #2. MKC has a trailing four-quarter earnings surprise of 13.8%, on average.The Zacks Consensus Estimate for McCormick’s current fiscal-year sales and earnings indicates growth of 0.6% and 8.2%, respectively, from the prior-year reported levels.Must-See: Solar Stocks Poised to SkyrocketThe solar industry stands to bounce back as tech companies and the economy transition away from fossil fuels to power the AI boom.Trillions of dollars will be invested in clean energy over the coming years – and analysts predict solar will account for 80% of the renewable energy expansion. This creates an outsized opportunity to profit in the near-term and for years to come. But you have to pick the right stocks to get into.Discover Zacks’ hottest solar stock recommendation FREE.Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Kimberly-Clark Corporation (KMB): Free Stock Analysis Report Freshpet, Inc. (FRPT): Free Stock Analysis Report McCormick & Company, Incorporated (MKC): Free Stock Analysis Report Ingredion Incorporated (INGR): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks