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Is Kimberly-Clark Corp. a Buy?

Kimberly-Clark's (NYSE: KMB) stock is cheap. Even as the broader market surged higher this year, the consumer products giant has declined. As a result, investors can now buy the owner of hit global brands like Kleenex, Huggies, and Scott for about 18 times earnings, compared to 24 times earnings for the broader market.

Cheap doesn't necessarily translate into a good value, though. Below, we'll look at a few reasons why you might want to pass on Kimberly-Clark stock and consider buying its industry peers instead.

Image source: Getty Images.

There's better growth out there

Kimberly-Clark can't do anything about the fact that its industry is slowing down. Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL) have both cited the same negative trends when explaining to investors why their sales are unusually low.

Yet Kimberly-Clark is faring worse than these companies, partly because its business is so focused on the weakening U.S. market. Organic sales are projected to be flat this year, compared to the 4% gain that Unilever is targeting. The performance gap is a bit smaller with respect to P&G, whose Pampers brand is Kimberly-Clark's main competition against the Huggies franchise.

Still, P&G is growing at a 2.5% pace today that represents an improving over last year's 2% uptick and the 1% gain the company logged in 2015. Kimberly-Clark is headed in the opposite direction, with organic growth slowing in 2017 for the second straight year. Thus, if you're looking for healthy growth, you'd be better off buying either P&G or Unilever.

Higher cash returns, too

Kimberly-Clark is removing some of the sting from those weak operating results through aggressive cost cuts. These savings are combining with increased dividend and share repurchase spending to lift shareholders' overall returns. But the company is being upstaged by peers on this score, too.

Procter & Gamble has reorganized its entire supply chain, recast its portfolio, and slashed expenses in spending categories ranging from manufacturing to packaging to advertising overhead. That program has removed almost $2 billion per year from its cost burden, with more cuts targeted through fiscal 2019. In that context, Kimberly-Clark's $400 million of annual savings doesn't look as impressive. Neither does its operating margin, which, at 18% today, still trails P&G's by a wide margin.

KMB Operating Margin (TTM) data by YCharts.

Kimberly-Clark's cash savings are funding about $2 billion in annual cash returns for shareholders, equivalent to roughly 5% of the company's market capitalization. P&G, meanwhile, sent $22 billion back to its investors last year, equating to over 10% of its market cap.

The best value

Kimberly-Clark pays a slightly higher dividend that yields 3.5% today compared to 2.9% for Unilever and 3.2% for P&G. The stock is valued at a significant discount to both these peers, too. You can buy shares for about 18 times next year's projected earnings, compared to around 21 times for P&G and Unilever.

I wouldn't be tempted by that discount, though, given Kimberly-Clark's long-term growth struggles. Sure, the company might engineer a rebound through a string of innovative product releases in its core tissue and diaper categories. The more likely scenario, however, is that sales will continue to lag or just keep up with the market as the U.S. segment stays brutally competitive.

Kimberly-Clark's strong cash flow would protect its long-running dividend in all but the most dire economic downturns. But it probably won't be enough to generate market-beating returns for investors -- at least until the company can start climbing back toward the 5% organic growth pace it posted two years ago.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Unilever. The Motley Fool has a disclosure policy.