Is Kimberly-Clark Corporation a Buy?

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Sometimes a tough operating stretch is just what a company needs to spur its management to make changes that lay the groundwork for new highs. That's the hope for investors looking at buying shares of Kimberly-Clark (NYSE: KMB) today. The consumer staples giant dominates several attractive niches, but the stock has trailed the market over the past five-year period as sales growth slowed to a crawl.

CEO Thomas Falk and his team have a rebound plan that includes slashing costs and directing the savings into long-run growth drivers. Below, we'll look at whether investors should buy into that strategy by picking up shares right now.

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Growth struggles

The fiscal year that just closed was disappointing on many fronts for Kimberly-Clark shareholders. The company initially targeted 2% organic sales growth, which would have just matched the prior year's result. Instead, sales gains slowed for the second straight year and were essentially flat in 2017. Most of its peers fared better even though the broader industry suffered from weak selling conditions. Procter & Gamble (NYSE: PG) expanded at 2% and Unilever (NYSE: UL) grew at a 4% rate.

Kimberly Clark's earnings picture worsened at the same time. Average selling prices dove by 8%, compared to a 1% dip in the prior year, and that shift sent operating profit into slightly negative territory in 2017.

The good news: Cost cuts helped offset those pricing challenges. After removing $450 million of annual expenses last year, in fact, Kimberly Clark managed a nice profitability boost that kept it competitive with industry leaders like P&G.

These wins funded a modest increase to the company's capital-return program; Kimberly-Clark sent $2.3 billion back to shareholders through dividends and stock buybacks compared to $2.1 billion in 2016.

Plan of attack

Management got the message that investors want to see better results from this business. "Even in slow-growth conditions," Falk said in a recent conference call, "we know we need to grow our profit and earnings to deliver attractive shareholder returns."

That's why the company just launched a restructuring plan that, by reducing employment, closing about a dozen manufacturing facilities, and divesting several underperforming brands, amounts to its biggest strategic shift since 2003. The moves should generate savings of between $500 million and $550 million by the end of 2021, roughly doubling its current cost-cutting plans.

With the $2 billion of funds these programs free up, Kimberly Clark's priority will be to invest in growth initiatives such as higher marketing spending, more innovative launches in its core Kleenex and Huggies franchises, and an aggressive push deeper into developing markets like China.

Looking ahead

Investors won't know for a while whether this strategy is working. Case in point: Though P&G's dramatic recovery plan launched in 2015, the company only recently started showing signs of accelerating organic growth. Kimberly-Clark's management is calling for organic sales gains of just 1% in 2018, which would imply another year of market-share losses as major peers, which aren't so dependent on the struggling U.S. industry, expand at rates between 2% and 4%.

In a reflection of that uncertainty, the stock is valued at a discount to rivals, with shares trading at a price-to-earnings multiple of about 18 compared to 22 for Unilever and P&G. Conservative investors might find that deal attractive since there's already plenty of pessimism priced into the stock. Still, I'd prefer to watch this story from the sidelines, at least until management can show progress toward ending its two-year sales slump through something more sustainable than price cuts.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.