On Thursday, consumer products firms Colgate (click ticker for report: CL) and Kimberly Clark (click ticker for report: KMB) posted strong second-quarter results. Both companies achieved strong organic growth and were able to offset increased raw and packaging material costs with higher pricing to drive earnings expansion, though Kimberly Clark’s was much more robust. We plan to make some tweaks to our valuation models of these companies, but we don’t expect to change our fair value estimates materially.
Net sales at Colgate advanced 2% in the quarter as global unit volume jumped 5% and pricing increased 3.5% (currency was a 6.5 percentage point headwind). The firm posted impressive organic revenue growth of 8% thanks to stellar performance in emerging markets where sales jumped 13% (developed markets expanded 2.5% during the period). Adjusted earnings per share advanced to $1.33 in the quarter (in line with consensus), up from $1.26 per share in the same quarter a year ago. Colgate successfully offset increases in raw and packaging material costs in the period, as gross margins swelled 50 basis points, to 57.7%. Looking ahead, the company expects diluted earnings per share during 2012 to grow at a double-digit rate (on a currency-neutral basis), a pace we think is achievable.
Similarly, Kimberly Clark achieved organic sales expansion of 5% during the second quarter thanks to improved volumes, up 2%, and better pricing, up 2% (product mix and currency accounted for the majority of the balance). Organic revenue at the firm’s international business (K-C International) grew 9%. Adjusted diluted net income per share at the company increased to $1.30 from $1.18 in the same period a year ago, despite unfavorable foreign currency exchange rates. Similar to Colgate, Kimberly Clark experienced significant adjusted gross margin expansion (up 240 basis points from the same period a year ago). The firm also raised its earnings outlook for the year to the range of $5.05 to $5.20 per share (was $5.00 to $5.15) as management now expects higher organic growth and improved margin performance relative to previous expectations.
The share price of each firm falls within its respective fair value range, so we’d look for a larger margin of safety before considering either in the portfolio of our Best Ideas Newsletter. Still, we’re keeping a close eye on both companies.