New York City-based Colgate-Palmolive Company (CL) operates as a manufacturer and seller of consumer products worldwide. The company operates through the Oral; Personal; Home Care; and Pet Nutrition segments. In comparison, Kimberly-Clark Corporation (KMB), which is also based in New York City, is a global manufacturer and marketer of personal care and consumer tissue products. The company operates through Personal Care; Consumer Tissue; and K-C Professional segments.
Although stock moved slightly higher on Tuesday,, the stock market closed down in its last session yesterday, amid investors’ concerns over the Russia-Ukraine war and the anticipated Fed’s rate increases this week. The S&P 500 and the tech-heavy Nasdaq fell on Monday, while the Dow closed flat.
The consumer defensive sector typically sees stable demand for its products, and as higher energy prices and higher interest rates are threatening to throw the economy into a recession, the providers of consumer products might thrive. Furthermore, if inflation persists, the consumer staples sector might be better positioned to pass on higher input costs to consumers, potentially placing them in a better position than the broader market. Both CL and KMB are well-positioned players in the consumer defensive industry and might in this scenario.
Over the past year, CL and KMB’s stock has declined 2.1% and 10.8% in price, respectively. CL has declined 1.2% over the past days, versus KMB’s 3.3% decline.
But which stock is a better buy now? Let’s find out.
Latest Developments
On March 10, CL announced a quarterly common stock cash dividend of $0.47 per share, payable to shareholders on May 13. The dividend includes a $0.02 increase from the previous dividend. The company also announced the repurchase of shares of its common stock, with an aggregate purchase price of up to $5 billion under a new share repurchase program. These developments reflect upon the company’s ability to generate cash and its ability to pay back shareholders.
On February 24, KMB announced the completion of its acquisition of a majority stake in Thinx, Inc., an industry disruptor and the leader in the reusable period and incontinence underwear category. Russ Torres, Group President of KMB’s North American consumer business, said, “The investment in Thinx paves the road for collaboration and allows us to work together to drive category growth with our retail partners while continuing to support Thinx in direct-to-consumer channels.”
Recent Financial Results
For its fiscal fourth quarter, ended Dec. 31, CL’s net sales increased 1.8% year-over-year to $4.40 billion. Its non-GAAP net income attributable to CL came in at $666 million, while its non-GAAP EPS stood at $0.79, up 0.2% and 2.6%, respectively, from the prior-year period.
KMB’s net sales increased 2.7% year-over-year to $4.97 billion in its fiscal fourth quarter, ended Dec. 31. However, its adjusted net income attributable to KMB and adjusted EPS decreased 23.8% and 23.1%, respectively, from the prior-year period to $439 million and $1.30.
Past and Expected Financial Performance
CL’s revenue has grown at a 3.9% CAGR, while EBITDA has grown at a CAGR of 0.9% over the past three years. Analysts expect CL’s EPS to increase 3.4% and 8.1%, respectively, in its fiscal years 2022 and 2023, respectively. Revenue for the same periods is expected to increase 1.6%, 2.6%, and 3.9%, respectively. The stock’s EPS is expected to increase 6.6% per annum over the next five years.
Over the past three years, KMB’s revenue has grown at a 1.7% CAGR, while its EBITDA has declined 1.3%. The Street expects its EPS to decrease by 4.5% for fiscal year 2022. KMB’s revenue is expected to increase 2.1% for the quarter ending June 30, 2022 and 2.4% for its fiscal year 2022. Its EPS is expected to increase 8.2% per annum over the next five years.
Profitability
CL’s $10.38 billion trailing-12-month gross profit is 1.7 times what KMB generates. CL is more profitable in terms of its gross profit, EBITDA, and net income margins of 59.55%, 25.18%, and 12.43%, respectively, compared to KMB’s 31.59%, 18.47%, and 9.33%.
CL’s 225.68%, 15.47%, and 26.40% respective ROE, ROA, and ROTC compare to KMB’s 229.64%, 10.05%, and 18.06%.
Therefore, CL is more profitable here.
Valuation
In terms of forward non-GAAP PEG, KMB is trading at 12.36x, which is 234.1% higher than CL’s 3.70x. However, CL’s forward non-GAAP P/E multiple of 22.28 is 10.9% higher than KMB’s 20.09.
POWR Ratings
CL has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In contrast, KMB has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
CL has a Quality grade of A. This is justified because its 59.55% gross profit margin is 78.37% higher than the 33.39% industry average. In comparison, KMB has a C grade for Quality, which is in sync with its 31.59% gross profit margin, which is 5.37% lower than the industry average.
Both the stocks have a B grade for Stability. CL’s and KMB’s beta of 0.61 and 0.52, respectively, justify this grade.
In the 63-stock Consumer Goods industry, CL is ranked #13, while KMB is ranked #23. Click here to see the additional POWR Ratings for CL. To see the additional POWR Ratings for KMB, click here.
Winner
The consumer defensive sector is typically known to withstand recessionary environments. Both CL and KMB are well-known names in the consumer defensive sector. However, considering CL’s higher profit margins, we think it could be a better buy here.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Consumer Goods industry here.
CL shares were trading at $75.53 per share on Tuesday afternoon, up $1.57 (+2.12%). Year-to-date, CL has declined -11.01%, versus a -10.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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