Kimberly-Clark Inc.’s stock experienced a 1.5% decline on Friday following BofA Securities’ downgrade of the stock from neutral to underperform. This downgrade was primarily due to concerns over the company’s profit margins.
Analyzing the situation, BofA Securities, led by Anna Lizzul, made the decision to cut their stock price target from $135 to $115.
Despite witnessing margin expansion until 2023, thanks to pricing benefits, cost savings, and improvements in input costs, the analysts expressed uncertainty about the future. Looking ahead to 2024, they anticipate a less certain gross margin landscape due to diminishing pricing benefits and potential impacts of higher oil prices on raw material inputs.
As the parent company of various consumer brands such as Huggies diapers and Scott and Kleenex tissues, Kimberly-Clark recently reported a stronger-than-expected profit for the last quarter. However, its sales fell slightly short of estimates. To counterbalance this, the company raised prices once again, successfully restoring its gross margin to pre-pandemic levels.
For a long time, Kimberly-Clark has relied on a premiumization strategy to achieve sustained organic sales growth by consistently raising prices. However, BofA Securities now expresses concern about the future, citing waning global birthrates and weaker volumes as potential threats to the company.
Addressing this concern, BofA Securities stated, “Given KMB’s position as a category leader in pricing, we expect consumers may be more willing to trade-down to private label in a more challenging economic environment.”
In a separate development, BofA Securities upgraded Clorox Co. from underperform to neutral on Friday, expressing increased confidence in the company’s recovery. Furthermore, the analysts raised their price target for Clorox Co. from $120 to $150, which is approximately 6% above its current price.
Clorox Recovery Expectations
In a recent note, analysts from Bank of America acknowledge a positive trend in the recovery of volume and shelf space for Clorox following the cyberattack it suffered in August. The analysts expect this recovery to allow Clorox to return to its annual growth rate of +3-5% as outlined in its Ignite strategy for F25/F26.
Clorox had to revise its guidance in October after revealing the impact of the cyberattack on its operations. The attack caused significant disruptions, including delays in order processing and widespread product shortages. Among the affected products were the popular Fresh Step Kitty Litter, as well as various cleaning materials.
Despite these challenges, the BofA analysts find reason for encouragement. They observe that Clorox’s private-label market share in its categories is gradually returning to pre-attack levels, even surpassing expectations in October and November. Notably, competitors have not seen significant benefits from the disruption, particularly in the cat litter category.
Looking ahead, Clorox anticipates a mild recession in F2H24 (early calendar 2024), which may exert some pressure on consumers. However, the balanced risk/reward profile of the company’s recovery efforts suggests a positive outlook.
It should be noted that Clorox’s stock remained unchanged on Friday, while Kimberly-Clark’s stock has experienced a 12% decline in the year-to-date period. In comparison, the S&P 500 index has posted a 23% gain during the same period.
