Kimberly-Clark

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, perhaps wait for Kimberly-Clark to get its pricing algorithms more finely tuned.