Procter & Gamble vs. Kimberly-Clark: Ignore the Headlines and Study the Numbers

If you’re an investor, odds are that when you’re checking out a new Facebook (FB) feature or eyeing Apple’s (AAPL) just-announced mini iPad, somewhere in the back of your mind you’re wondering what effect these will have on the profits and stock price of both companies. How often do you do the same when you’re doing the laundry or grabbing the next diaper from a bag of Huggies?

With two big household products companies set to report their third-quarter earnings this week, it might be time to do just that. Kimberly-Clark (KMB) and Procter & Gamble (PG) appear to offer very different sets of fundamentals to investors.

Kimberly-Clark, analysts believe, is poised to announce higher earnings and perhaps even a positive earnings surprise for the just-ended quarter. Analysts predict earnings of $1.32 a share, up 4.8% from year earlier levels; if it delivers a better result, that would mark the third quarter in a row for positive surprises.

In contrast, Procter & Gamble seems mired in controversy. Activist hedge fund manager Bill Ackman is nagging the company’s board to dump its CEO and his concerns about underwhelming profit, a decline in market share in many product categories and a lack of innovative new products, are reportedly shared by current and former top P&G managers. Analysts currently expect the company to announce a decline of 6.8% in earnings for the just-ended quarter, and report profits of 96 cents a share. While analysts have left the forecast for Kimberly-Clark’s earnings unchanged over the course of the quarter, they have trimmed their expectations for P&G, making any positive surprise less meaningful.

It’s clear which company looks like the better investment – or at least, the less risky. As always, however, it’s worth taking a second look. First of all, there’s the fact that while P&G’s earnings seem under pressure today, the year-over-year quarterly growth rate appears to be on a more positive trend line than that of Kimberly-Clark. That’s worth a second look, to determine the source of that growth and whether it’s sustainable.

PG Net Income Quarterly YoY Growth Chart

PG Net Income Quarterly YoY Growth data by YCharts

Looking at total net income, as opposed to just earnings per share, is important because both companies are aggressive purchasers of their own stock, and doing so gooses EPS.

PG Shares Outstanding Chart

PG Shares Outstanding data by YCharts

Secondly, both companies are suffering from an increasingly common problem, and one to which investors should be paying keen attention. While profits may be growing, revenues are not, as this chart portrays.

KMB Revenue Quarterly YoY Growth Chart

KMB Revenue Quarterly YoY Growth data by YCharts

And, oddly, despite all the negative karma surrounding P&G, its valuation, based on PE ratio, is nearly identical to Kimberly Clark’s.

PG PE Ratio TTM Chart

PG PE Ratio TTM data by YCharts

That means that you will need to delve more deeply into not only both companies’ plans to boost their top line but examine their ability to further control costs.

KMB SG&A Expense Quarterly YoY Growth Chart

KMB SG&A Expense Quarterly YoY Growth data by YCharts

KMB SG&A Expense Quarterly YoY Growth Chart

KMB SG&A Expense Quarterly YoY Growth data by YCharts

Absent some kind of catalyst – a new kind of toilet paper or detergent? – data like this will provide indications of which company is likely to outperform, or whether it might be better to steer clear of both of them as they try with increasing desperation to squeeze every fraction of a penny of profit out of every dollar of still-declining revenues.

Suzanne McGee is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.

Read more articles about: Company Analysis  

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