KMB and PG – Better Than Feared and Better Than the Rest
Both KMB and PG reported earnings this morning and both stocks are enjoying significant, positive reactions on both a relative and absolute basis.
The strength of the reactions likely is rooted in several factors that extend beyond the quality of the individual earnings releases (more on that in a bit):
- Continued weakness in global equity markets prompting a flight to safety (and we would define safety in this case as meaning, in part, that there is no longer any near-term event risk in either name);
- The quality of the results in relation to the balance of earnings (consumer and otherwise) reported thus far;
- The wall of worry that each company’s earnings helped investors scale with respect to concerns about the consumer, both here and abroad;
- The relative attractiveness of the staples group versus consumer discretionary even in the absence of concerns about the global macro environment.
Our view is that KMB’s results were the better of the two, with EPS coming in $0.05 ahead of consensus ($1.44 vs. $1.39) and a more than respectable 5.0% increase in constant currency organic sales accompanied by leverage on the EBIT line (adjusted for currency) of 7.9%. Guidance for ’14 effectively bracketed consensus of $6.11.
- Ultimately, KMB’s results are difficult to poke holes in – 12.7% year over year decline in FCF is our primary issue, driving a 4.9% decline in full-year FCF despite a 9.9% increase in year over year in EPS – ultimately, only one of these numbers should matter to investors.
- The multiple at KMB also continues to give us pause – 17.8x for a company’s whose long-term top-line growth profile is in the 3% range seems a tad aggressive.
PG results were less “impressive” with earnings coming in light of consensus by $0.03 when adjusted for a lower tax rate. Organic revenue growth was 3%, which, based on the stock reaction, was better than feared. The company endorsed ’14 guidance across all metrics (2 quarters remaining).
- Again, valuation when viewed within the context of the company’s ability to grow revenue and EPS seems full – 18.0x calendar ’14, nearly identical to KMB.
Better than feared and better than the rest are probably the themes of the day with respect to consumer staples. Coupled with some likely short covering in both PG and KMB, we think the stock reactions are disproportionate to the quality of the results and likely rooted in other factors, as mentioned above. We see neither stock as a particularly compelling value for investors, particularly after today’s move.