Business DescriptionOn June 29, 1928, Kimberly-Clark Corporation (K-C) was incorporated. Kimberly-Clark Corporation is known for producing and showcasing various products made from natural or man-made fibers (Reuters). The company holds strong market share in many segments of the personal products industry including personal care, professional and corporate care, and consumers tissues. With employee strength of over 66,000 people, Kimberly-Clark currently has manufacturing plants in 41 nations, and its products are sold in over 175 countries. Beyond North America, operations include both developed and emerging markets. They are known for great brands such as Huggies and Depend among many others. Current product lines rank number one or number two in 76 countries, with almost 1.3 billion people using Kimberly-Clark products every year.Kimberly-Clark is an organization that reliably accentuates quality, administration and reasonable dealing. As a company, they take pride in surpassing the expectations of their clients, partners and investors. Their goal is to become one of the best companies in the world as far as employment, products, and shareholders’ profit is concerned (Reference for Business). Kimberly-Clark is recognized as one of the leading manufacturers of tissue globally and is second when it comes to household and personal care products in the United States (Reference for Business).Operation and Product DiversificationOperations are in three main segments: personal care, consumer tissue, and K-C professional in their order of relevance. While the company deals directly, its major distribution channels are grocery stores, supermarkets, pharmaceutical stores, and other types of retail and wholesale outlets (Reuters).Personal CareProducts offered in this business segment include a range of pants, feminine care products, and other baby products such as wipes and diapers. Recognized brand names under this business segment include Depend, DryNites, and Huggies (kimberly-clark.com). Products in this segment are considered household products and are sold either directly to consumers or through channels such as supermarkets, wholesalers, and pharmacies (kimberly-clark.com). These brands are manufactured in 49 Kimberly-Clark facilities globally (www.kimberly-clark.com). Consumer Tissue (Family Care)This segment of Kimberly-Clark’s business offers products such as napkins, paper towels, tissues used in bathrooms, and facial tissues. Brand names in this segment include Scott, Neve, Andrex, Kleenex, Scottex, and Viva (kimberly-clark.com). These products are also considered as household products and hence are sold through the same channel as Personal Care products (kimberly-clark.com). Consumer tissues products are manufactured in 55 K-C manufacturing facilities.Kimberly-Clark Professional (Business-to-Business)This segment of Kimberly-Clark Corporation produces and markets are known for products classified as disposable and hygiene products. They are not usually sold to homes, but mainly to businesses directly, specifically healthcare facilities. Products that fall in this category include disposable face masks for health centers, exam gloves, sterilization wrap, surgical gowns, paper towels, sanitizers, bathroom tissues, products for infection control, and soaps. This segment is recognized with great brands such as WypAll, Kleenex, and Scott, to mention but a few. Kimberly-Clark Professional products are made in 55 manufacturing facilities globally (kimberly-clark.com).StrategySimilar to various industry players, Kimberly-Clark Corporation uses sustainable packaging to maintain a green reputation(vault.com). This year, K-C announced that 95 percent of the waste produced during manufacturing will be diverted from landfills. A significant amount of waste from K-C products are sold to other customers who find it needful for their production (vault.com). Apart from this, in a bid to reduce the number of polymers being purchased for production, Kimberly-Clark adopted a strategy aimed at producing polymer pellets from nonwoven waste, and make use of the produced pellets in products manufacturing. The strategy of reconverting these wastes to polymers, while selling some wastes to other companies, has been beneficial from a financial, as well as environment perspective (kimberly-clark.com). The major strategies adopted by the company focuses on managing its portfolio with the aim of balancing profitability, growth, and cash flow. Kimberly-Clark also invests heavily in their brands, initiatives for growth, and innovations. In the personal care segment of the business, K-C invests heavily due to its high margin. Taking advantage of its powerful brands under this segment, K-C focuses on development and innovation for enhanced market penetration. Kimberly-Clark also targets more growth and improvement in the consumer tissue segment. Through value-added innovation, the company has strengthened the brands under this segment, while reducing costs of production and improving product mix. Kimberly-Clark continues to grow globally, focusing more on Latin America, Russia, and China.Increase in marketing spending is one strategy that has also worked for the company. In the last five years, Kimberly-Clark has spent almost $300 million and has no plans of going back on this strategy. This strategy aims to improve market share and brand equity, as well as provide support for innovation and growth globally. Kimberly-Clark is recognized for its innovative history. Their innovation sense lies on meeting the needs and wants of consumers, which in turn generates growth. All investments in innovation focus on brand improvement, margin enhancement, and new category exploration.Industry Overview and Competitive PositioningKimberly-Clark Corporation operates in the personal products industry. There is a difference in the concentration level of products within total market share. For instance, the market for disposable diapers is dominated by Procter & Gamble and Kimberly-Clark, with just the both of them accounting for over 40 percent of this segment’s market share (Cohen, p. 16). This is also the same for tissue products, with Georgia-Pacific estimated to hold almost 50 percent of the market share. Brand loyalty in this industry is also very high compared to other industries involved in paper conversion. This continuously increases the competitiveness of the industry. Because the personal products industry is involved in the production of non discretionary products, fluctuations in revenue do not heavily affect this industry. It was expected that by 2017, the industry revenue will have declined to $12.0 billion. The reason for the slow decline in the industry revenue can be attributed to an increase in the trade-weighted index, thus ensuring that the market is flowed with imports at low cost. Nonetheless, due to the increasing per capita disposable income, it is estimated by IBISWorld that industry revenue will raise by 0.3 percent (Cohen, p. 19). Industry DriversThere are several factors that drive the success of players in this industry. Some of them are described below.Number of birthsRevenue from disposable diapers is considered the largest in this industry, and the demand for baby products is solely dependent on the number of newborn babies. As the number of births increases, the demand for baby wipes and disposable baby diapers also increases, and in turn boosts the revenue of the industry. The opposite happens when the number of newborn decreases. From projections, the number of newborns will increase in 2017. Per capita disposable incomeThis factor measures the ability of the consumers to purchase goods and services. As income decreases, the purchasing power of consumers reduces and customers purchase products with lower cost and quality. An increase in the income of workers would lead to a corresponding increase in purchasing power, and thus consumers purchase prominent brand. This also results to greater revenue in the industry. In 2017, there will be an increase in per capita disposable income.Trade-weighted index (TWI)The above factor measures the value of the dollars in comparison to the currencies of trading partners. An increase in TWI leads to a corresponding increase in the price of United States exports. This reduces industry revenue as exports make global exports become less competitive. As exports become less competitive, imports increases, and domestic manufacturers enjoy this trend. In 2017, TWI is projected to decrease a little bit, but will remain considerably high, thus signifying a threat to the personal products industry.Number of adults aged 65 and olderIn America, the number of people aged 65 and older is increasing, and this is advantageous to the industry. Elderly people make use of incontinence goods like adult diapers. While the number of elderly people is expected to continue increasing in 2017, this represents a great opportunity for players in the Sanitary Paper Product Manufacturing Industry.Major PlayersThere are four key players in the personal products industry: “Procter & Gamble, Kimberly-Clark, Georgia-Pacific and Essity Aktiebolag” (Cohen, p. 12). These four companies hold 92.7 percent of the industry market share. The rate of change in technology and high level of acceptance by consumers indicate that the industry is mature. In the disposable diaper market, Procter & Gamble and Kimberly-Clark operate a duopoly, with other players in the industry competing in niche markets. The market for toilet paper is less concentrated and has several key players holding the majority of the market share. These companies include “Kimberly-Clark, Procter & Gamble, Georgia-Pacific, Essity Aktiebolag” (Cohen, p. 22) with other private companies holding considerable market share in this segment. There is limited opportunity for growth in this segment.Competitive PositioningCompanies with the ability to adopt novel technologies in production will tend to capture more customers, as they are more likely to meet the ever-changing tastes of consumers with more efficient production processes (IBISWorld, p. 22). Furthermore, competitive advantage is afforded to key players that position themselves well in the market by maintaining relationships with major distribution, retail networks, and exporters. The location of manufacturing facilities also provides organizations with a competitive advantage. Positioning plants close to key markets will help organizations save by reducing the cost of transporting products. Another competition positioning tactic used by players of this industry is the ability to change or alter their products in response to the demands of the market. Brand name plays a major role in this industry, as consumers associate brand name with high quality. In this light, brand recognition plays a vital role in reputation and sales of this industry. Kimberly-Clark’s positioning in the export markets has been one of its strength in the industry. Exports provide opportunity for growth in revenue.Investment ThesisKimberly-Clark has five billion-dollar brands (Huggies, Scott, Kleenex, Cottonelle, and Kotex) which make up a solid foundation for the company. Kimberly-Clark is currently driving rapid growth in Developing & Emerging Markets with a strong focus on China, Eastern Europe, and Latin America. In the past five years they have seen double-digit sales growth and improved operating margins. In addition, Kimberly-Clark is investing in growth and spending more money advertising in order to build brand equity and support innovation. The company has been utilizing non-traditional channels of marketing in order to remain competitive in the current world of digital media. Capital spending is used to fund business needs such as innovation, growth, and cost savings as well. The company’s major sustainable cost reduction program is known as FORCE ( Focus on Reducing Costs Everywhere). It focuses on maximizing efficiency in the supply chain and it has delivered $2.9 billion in cost savings between 2004-2016.Investment RiskOperational RisksBoth domestically and abroad, Kimberly-Clark faces competition that applies a downward pressure on sales and pricing. Changes in consumer purchasing patterns and a failure to anticipate these changes could prove to be detrimental to the company’s financial success. Poor marketing efforts and a lack of innovation are also potential risks that could decrease sales. When it comes to marketing as a global brand, Kimberly-Clark must understand how to market to people of different cultures appropriately. Many American corporations have trouble succeeding in foreign markets because they do not align their strategies to best satisfy the foreign consumer’s needs. Even though foreign markets have a significant potential to become large growth opportunities, there are many risks associated with them. Finally, any failure or inefficiency in the supply chain could negatively impact Kimberly-Clark’s performance.Regulatory RiskWith products in 175 countries and operations in 38, Kimberly-Clark is subject to social and political unrest as well as exchange rate risk. Certain product lines are subject to regulation from the Food and Drug Administration and comparable foreign organizations. The introduction of a new tax or regulation in the United States or in a foreign market could have a negative impact on Kimberly-Clark.Financial AnalysisKimberly-Clark has had a negative trend in its current and quick ratio from 2012-2016. While initially enjoying a current ratio above 1 in 2012 and 2013, displaying their liquidity and ability to pay back short term liabilities. From 2014 to 2016, however, the current ratio has dipped below 1, although there is an upward trend in this ratio from 2015 to 2016. Kimberly-Clark has enjoyed an upward trend in their gross profit margin, which can be seen as evidence of their Focus on Reducing Cost Everywhere (FORCE) initiative. ROA has been favorable, fluctuating in the range of 6%-14% in the past five years of financials. In 2016, ROE was negative due to paid in capital higher than retained earnings, resulting in a negative total equity. This is a cause for concern, but negative shareholders equity is likely due to an accounting method used to account for losses incurred in 2015 and 2016. Compared to a benchmark competitor of Procter and Gamble (P&G), Kimberly-Clark enjoyed a higher current ratio in 2012 and 2013. However, in 2016 P&G had a current ratio of 1.098, while Kimberly-Clark had a ratio of 0.875. Therefore, Kimberly-Clark has a liquidity problem relative to its competitors in the industry. Additionally, P&G had a higher gross profit margin, which stayed in the range of 51%-55%. Clearly, Kimberly-Clark has a reasonable opportunity to continue growing its gross profit margins to a level similar to its competitors.ValuationAfter evaluating financial statements and performing a valuation, we believe Kimberly-Clark is underperforming. Using a free cash flow to equity discount model, we determined the intrinsic value of KMB to be $112.26 per share. We chose FCFE instead of DDM because, even though Kimberly-Clark pays a consistent dividend, we did not feel that it could convey its intrinsic value as accurately as a method that took accounting variables into consideration. We believed that Kimberly-Clark would be able to have sales growth in 2017 based on projected year-to-date earnings reports. Based on this information, we assumed that sales would grow slowly to a terminal growth value of 2% over a 10 year span. Additionally, we considered Kimberly-Clark’s FORCE initiative and positive gross profit margin trend and projected that COGS would decline to a terminal percentage of 53.9% of sales in 2028. Using these parameters, we found the present value of all future cash flows including a time adjustment to be $40,029,105. Dividing this value by the current number of shares outstanding, 356,568, we found an intrinsic value of $112.26 per share. Comparing this to a share value at the time of valuation of $122.16, we believe KMB is currently overvalued and underperforming, and therefore suggest a sell.ConclusionOur team considers Kimberly-Clark Corporation an underperforming company in the personal products industry. Issues such as recent liquidity and negative ROE pose problems in the short term that could deter investors. Our valuation relies on whether Kimberly-Clark can commit to improving gross profit margin through a combination of reducing costs and growing sales. Pessimism due to Kimberly-Clark’s recent negative sales growth forces us to be cautionary in the company’s ability to fully meet our expectations, and therefore we suggest a sell instead of a hold.
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