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We are reiterating our Neutral recommendation on Kimberly-Clark Corporation (KMB - Analyst Report) following its second quarter 2012 results.

Kimberly-Clark delivered second quarter 2012 earnings of $1.30 per share, which surpassed the Zacks Consensus Estimate by 1.6% and the prior-year quarter earnings by 10.2%. The upswing in earnings was driven by organic sales growth and cost savings.

The company’s net sales remained flat year on year at $5.3 billion, which were also in line with the Zacks Consensus Estimate of revenue. Organic sales climbed 5% in the second quarter of 2012, supported by higher pricing and sales volume and a 9% increase in K-C International.

We are encouraged by the company’s leadership position in several consumer product categories including diapers, paper goods, health care products, and female personal care. Moreover, Kimberly-Clark focuses on improving its products through innovation in order to remain competitive and drive growth.

Kimberly-Clark is also well-positioned overseas, and derives almost half of its revenues outside the U.S. The company has been investing in key emerging markets through K-C International (‘KCI’), which includes businesses in Asia, Latin America, the Middle East, Eastern Europe and Africa, with a particular emphasis on China, Brazil, India and Russia.

Moreover, we are optimistic about the company’s restructuring program as it improves underlying profitability and return on invested capital of its consumer tissue and K-C Professional segments, which have been facing declining profits for many years. Further, management’s initiatives to control costs through its FORCE program bode well for future operating performance.

However, the company has been hit hard by uncertain economy and increasing inflation, resulting from the tight supply of raw materials. The company is also facing unprecedented volatility in the global commodity, currency, and financial markets. The company expects economic conditions to remain volatile during the second half of 2012. We thus prefer to remain on the sidelines with a Neutral recommendation.

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