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Tickers in this Article: KMB, PG, UN, UL, CLX
Consumer products giant Kimberly-Clark (NYSE:KMB) has been on a restructuring campaign to lower costs and become more competitive. Its third-quarter results suggest it is losing the war against controlling costs, which could be worrisome if it becomes a trend. IN PICTURES: How To Make Your First $1 Million

Third-Quarter Sales Review
Total net sales grew a modest 1.3% to reach $5 billion. Organic sales improved 1% on increased volumes as prices remained flat compared to last year's third quarter. An acquisition added 1% of growth but was offset by a 1% top-line decline due to negative currency fluctuations.

Kimberly-Clark operates four primary divisions. The fastest-growing segment was health care, which sells disposable products such as hospital gowns and exam gloves. It grew 4.6% as the acquisition of I-Flow Corporation boosted the top line by 11% to offset a 4% fall in volumes and 2% decline in pricing from the existing business, such as lower sales of face masks from the H1N1 scare last year.

The personal care group is the largest and reported the next highest sales growth at 2.4%. This unit includes the firm's flagship Huggies diaper business as well as a number of other well-known brands. Consumer tissue saw sales rise 1.1% on respectable growth in the Kleenex tissue and Scott paper towel lines. The final segment, K-C Professional, sells company products at away-from-home markets and saw sales fall 3%.

Profit Recap and Outlook
Divisional operating profit fell across the board and was attributed primarily to higher raw materials costs. Personal care is the largest profit generator and saw operating income fall 8.4% to $428 million. The other three segments reported large profit declines around 30%. Total company operating profits fell 19.9% to $698 million.

Subtracting out corporate costs, total company operating income fell 20.6% to $644 million. Net income fell 20% to $489 million, or $1.14 per diluted share.

For the full year, management projects a sales increase of 3% and 2-4% in earnings growth. Both represented decreases from previous guidance, and earnings are now expected to come in between $4.60 and $4.70 per share.

Expense Problems
At a forward P/E of 14.3, Kimberly-Clark has one of the lowest earnings multiples in its peer group. This quarter demonstrated why the company may deserve a lower multiple as management could be losing some control over its ability to control expenses. Higher commodity costs are outside of its control, but marketing, research, and general expenses rose much faster than sales at 6.7%.

The company is in the midst of a campaign to lower costs and become more competitive, but rivals including Procter & Gamble (NYSE:PG) and Clorox (NYSE:CLX) are currently much more profitable. Unilever (NYSE:UN) (NYSE:UL) is about as profitable, trades at a slightly higher forward multiple, and is relying on acquisitions to boost organic growth.

Bottom Line
As such, Kimberly-Clark stands in the middle in terms of investment appeal. One quarter does not make a trend, but it could indicate that the firm's profit growth will again become more erratic in the future. However, its 4% dividend yield is the highest out of the rivals listed above and is certainly nothing to sneeze at. (For related reading, see A Guide To Investing In Consumer Staples.)

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