Zacks Equity Research has issued an "Outperform" recommendation for Kimberly-Clark (KMB), with a price target of $170.00 over the next 6-12 months. This reflects a 19.5% upside potential from its current price of $142.25, as of October 11, 2024. Despite macroeconomic challenges such as inflation and volatile market conditions, Kimberly-Clark's focus on innovation and operational efficiency has positioned it well for sustainable growth. Below, we break down the key points for investors to consider when evaluating KMB as part of their portfolio.

Strong Momentum Driven by Volume-and-Mix Growth Model

Shift to Volume-and-Mix Growth: Over the past six months, Kimberly-Clark's shares have outperformed the industry, gaining 13.5%, compared to the sector's 9.7%. This growth is primarily due to the company's strategic shift from price-driven to volume-and-mix-driven growth. The introduction of innovative products, coupled with advanced technologies, has enabled the company to cater to shifting consumer demands across key markets, including China, North America, and Australia-New Zealand.

North American Performance and International Expansion: Kimberly-Clark continues to see solid consumption-driven volume gains, particularly in North America and China, where double-digit growth was recorded for the second consecutive quarter. The company has also made significant strides in Emerging Markets and Developed Markets, recording mid-single-digit volume growth in its Consumer Tissue segment. This shift highlights strong commercial execution, driving organic sales growth and supporting the company's momentum heading into 2025.

Strategic Focus on Efficiency and Market Expansion

Organizational Reengineering for Growth: Kimberly-Clark's Wire Our Organization for Growth strategy aims to boost operational efficiency by restructuring its global supply chain. The company is integrating its North America and International supply chains, allowing for a more seamless and productive operation. Furthermore, the company is exiting non-core markets, including divestitures of its Personal Protective Equipment business and operations in Nigeria and Bolivia, to focus on high-growth areas.

Innovation and Product Development: Innovation remains a cornerstone of Kimberly-Clark's strategy, and the company plans to increase its investments in product development in the latter half of 2024. With a strong pipeline of new products, Kimberly-Clark is well-positioned to drive long-term value creation and strengthen its global market share. This focus on innovation, along with enhanced supply chain capabilities, is expected to support its future growth.

Revenue Growth and Cost Optimization

Effective Revenue Growth Management: Kimberly-Clark has effectively leveraged its pricing strategies to mitigate cost inflation, especially in hyperinflationary economies like Argentina. In the second quarter of 2024, organic sales grew by 4%, driven by 2% price increases and a favorable mix. The company's gross margin expanded by 290 basis points (bps) to 36.9%, underscoring its ability to navigate inflationary pressures and boost profitability.

Mid-Single-Digit Sales Growth Expected for 2024: The company projects organic net sales growth of around 4.8% for 2024, supported by continued improvements in volume and mix trends. Management also forecasts that pricing strategies in hyperinflationary markets will contribute approximately 300 bps to the organic growth for the year.

Robust Cost-Saving Initiatives

FORCE and Restructuring Programs: Kimberly-Clark continues to execute its Focus on Reducing Costs Everywhere (FORCE) program, which has generated $250 million in gross supply chain productivity through the first half of 2024. These savings are being reinvested in research and development, brand building, and commercial capabilities, further enhancing the company’s growth prospects.

Restructuring Efforts: As part of the company’s 2018 Global Restructuring Program, Kimberly-Clark has exited low-margin businesses and closed underperforming facilities, resulting in a more streamlined operational footprint. This program, which concluded at the end of 2021, is now bearing fruit as the company focuses on its core strengths and margin optimization.

Challenges and Risks

Currency Fluctuations: Given its exposure to international markets, Kimberly-Clark remains vulnerable to currency headwinds. The company reported a 5% negative impact on sales due to foreign currency fluctuations in the second quarter of 2024, and expects a 400 bps drag on full-year net sales.

Inflationary Pressures and Retail Volatility: Rising inflation, particularly in manufacturing costs, and a dynamic retail environment continue to pose challenges for Kimberly-Clark. The company is facing reduced retail inventory levels and changing consumer spending patterns, which are affecting its K-C Professional unit. In the second quarter of 2024, the segment's sales were down by 5%, due in part to divestitures and adverse currency effects.

Financial Outlook and Valuation

Mid-to-High-Teens Operating Profit Growth for 2024: Kimberly-Clark's management has raised its guidance for 2024, now projecting operating profit growth in the mid-to-high teens on a constant-currency basis. This increase reflects improved productivity, organic sales growth, and strategic cost management initiatives.

Price Target and Valuation: Based on these positive factors, Zacks has set a 12-month price target of $170.00, implying a forward P/E ratio of 22.79x. This valuation reflects a premium over the Zacks sub-industry average, but is supported by Kimberly-Clark’s strong revenue growth outlook, cost management strategies, and leadership in innovation.