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We reaffirm our Neutral recommendation on Kimberly-Clark Corporation (KMB - Analyst Report). While the company has been delivering solid results, the continued slowdown in the healthcare segment is hurting its growth.

Why the Reiteration?

Kimberly-Clark posted better-than-expected results in all the last four quarters. Organic sales growth, product innovation and cost savings measures have remained the company’s strong points. However, increased input costs and macroeconomic headwinds continue to raise concern.

The company has a leading position in several consumer product categories including diapers, paper goods and female personal care. Moreover, Kimberly-Clark focuses on improving its products through innovation to retain its front-running position and drive growth. Popular product launches in 2012 ranged from super-premium Depend briefs, New U by Kotex tampons and pads, Huggies Little Movers Slip-On diapers, Poise Hourglass Shape pads, Kleenex Cool Touch facial tissue, and improved Cottenelle bathroom tissue. These have been contributing to the revenue growth in 2013.

Kimberly-Clark is well positioned overseas and has been regularly expanding in the key emerging markets through K-C International, which includes businesses in Asia, Latin America, the Middle East, Eastern Europe and Africa, with particular emphasis on China, Brazil, India and Russia. K-C International accounted for 37% of the company’s 2012 revenues, 36% of 2011 revenues and 33% of 2010 revenues, showing a consistent rise.

We are also optimistic about the company’s restructuring program as it is likely to improve underlying profitability and return on invested capital at its consumer tissue and K-C Professional segments, profits from which have been declining for many years. Further, initiatives to control costs through its FORCE program bode well for future operating performance. In addition, the company’s divestiture of low-margin Huggies diapers businesses in all the European markets, except Italy, will also help it utilize its resources in more promising markets.

However, lower consumer spending pattern due to an adverse macroeconomic environment, unfavorable currency and higher input costs remain headwinds for the company. The company’s decelerated sales growth in the healthcare segment over the past four quarters is also raising concerns. Kimberly-Clark has, thus, decided to spin-off its healthcare business to optimize its performance and offer flexibility to pursue its own value-creation opportunities. Kimberly-Clark thus holds a Zacks Rank #4 (Sell).

Other Stocks to Consider

Other better-ranked stocks in the consumer staples sector include Hain Celestial Group, Inc. (HAIN - Analyst Report), ConAgra Foods, Inc. (CAG - Analyst Report) and Green Mountain Coffee Roasters, Inc. (GMCR - Analyst Report). While Hain Celestial carries a Zacks Rank #1 (Strong Buy), ConAgra Foods and Green Mountain carry a Zacks Rank #2 (Buy).

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