Pricing of products often requires a delicate balance
The recent earnings release by Kimberly-Clark (NYSE: KMB) is a classic illustration of price elasticity. Lower prices sell more goods, allowing a company to lower prices again – igniting a virtuous cycle.
But the cycle also works in reverse, as Kimberly-Clark has discovered. It recently hiked prices to cover higher commodity costs, but management may have taken it a bit too far. Consolidated prices in the third quarter were 4 percent higher, but case volume ran down 1 percent. What’s worse, consumer tissue case volume declined 7 percent. Even toilet paper obeys the basic laws of economics.
This price elasticity game is nothing new to consumer products companies. With the steep rise in commodity prices over the past year, many firms are exercising as much pricing power as they think their brands will bear.
Kimberly-Clark – whose brands include Kleenex and Huggies – still managed to make its estimated numbers for the third quarter. But management lowered fourth-quarter earnings projections, which promptly clobbered the stock.
It’s true that the consumer products companies are a (relatively) safe investment during tough markets. Still, it’s smart to be picky even among defensive plays. With choices such as Procter & Gamble and Colgate-Palmolive also trading close to 12-month lows, you might want to wait for Kimberly-Clark to get its pricing algorithms more finely tuned.
Ask the Fool
Q: Can I give single shares of stock as holiday gifts? If so, how? – D.Y., Lawrence, Kan.
A: You sure can, and it’s a gift idea that could transform your loved ones’ financial futures.
You can buy one share of a stock as a gift at Web sites such as www.registerstock.com and www.oneshare.com. It’s not the smartest way to invest for yourself, though, as you may pay $15 or more in fees to buy one $30 share of stock (that would cost you 50 percent from the get-go). But if it’s a gift, the recipient ends up with a $30 stock that might be worth $60 or much more one day.
When buying stock for yourself, take commissions and fees into account. Try to not pay more than 2 or 3 percent of an investment’s value in fees. (For a $500 investment, that would be $10 or $15.) Learn more about how to invest effectively with just a few dollars via direct investment plans or dividend reinvestment plans (“DRIPs”) at www.dripcentral.com and www.fool.com/School/ DRIPs.htm.
Q: Where can I find historical prices of a stock? I want to learn how much it traded for on a particular day some years ago. – O.M., Dover, N.H.
A: Sometimes the company itself can tell you. Try giving its investor relations department a call. Another good resource is your public library, where librarians should be able to help you look up the price in newspaper archives or elsewhere. If you’re online, it’s much easier. Click over to http://finance.yahoo.com, type in the company’s ticker symbol, and once you get its quote page, click on the “Historical Prices” link in the blue box on the left side of the page.
My dumbest investment
In January 1993, I decided to invest $2,000 in McDonald’s because I felt it would feed the world, eventually. But I then talked myself out of it and went with Apple because a friend recommended it and I’d just bought an Apple computer. The day I bought Apple was the last day it was ever that high! It immediately started falling, and I bailed out with an 82 percent loss. Meanwhile, McDonald’s is feeding the world. – Lori Grossman, St. Louis
The Fool Responds: Lori, you shared this story with us in 1999. You may be surprised by what has happened with the companies: Between January 1993 and now, McDonald’s stock has averaged 12 percent annual growth, while Apple has averaged 14 percent. Both are solid market-beating performances, as the S&P 500 averaged just 7 percent in that period. The lesson here is to focus on the long term. You soon regretted buying Apple, but had anything changed about your expectations of the company’s growth? Choose companies whose futures you believe in, after researching them and their numbers.