Company Reports

Wide-moat Kenvue announced late on May 14 that it had priced its secondary underwritten public offering of 182.3 million of its shares still owned by Johnson & Johnson at $20 apiece. We maintain our fair value estimate of $25.50 per share as we have made no changes to our model. Given where the stock is currently trading, we think $20 per share for the exchange is fairly priced, but we still believe that the market is underappreciating the firm’s portfolio of category-leading brands and that the stock has a lot of upside.

Wide-moat Kenvue reported mixed first-quarter results that were largely in line with our expectations. Total sales of $3.9 billion were up 1.1% year over year as moderate pricing and a strong demand environment in Europe, Middle East, and Africa and Latin America offset overall weak volume. We maintain our fair value estimate of $25.50 per share, as minor adjustments to our near-term assumptions were immaterial to the valuation.

On Saturday, April 20, an Illinois judge ordered Johnson & Johnson and Kenvue to pay $45 million to a family relating to a fatal cancer from the companies’ Johnson’s baby powder. According to Bloomberg, jurors concluded that Kenvue was 70% responsible for the death, and J&J and one of its units were responsible for the remaining 30%. While action plans for both companies remain unclear, we expect Kenvue and J&J to appeal the case. Furthermore, we continue to believe that any litigation regarding talc will not affect Kenvue’s wide moat rating or $25.50 fair value estimate, given that the firm has an indemnity agreement from J&J that covers all talc-related liabilities in North America. While Kenvue remains responsible for any liability outside the US and Canada, we believe this is immaterial.

Wide-moat Kenvue reported fourth-quarter earnings that came in weaker than our expectations. Total sales were down 2.7% year over year as challenges in the skin health and beauty segment persist and normalization of cough and cold season led to tough comparisons against 2022 for self care. Price and mix, which contributed 5.8% of growth, weren’t didn't offset a volume loss of 8.2%. But we think idiosyncrasies during the quarter such as product discontinuation (negative 1% in sales) and pullback in retail inventory restocking (negative 1%) somewhat mask the underlying strength of the firm’s portfolio. We still expect certain challenges to create additional headwinds in 2024 and also model weaker pricing benefits as inflation has largely stabilized. After adjusting our near-term assumptions, we lowered our fair value estimate to $25.50 per share from $27.50.

Kenvue is the world’s largest pure-play consumer health company by revenue, generating $15 billion in annual sales. Formerly known as Johnson & Johnson’s consumer segment, Kenvue spun off and went public in May 2023. We expect Kenvue, with the freedom to allocate capital and invest as a standalone entity, to mainly focus on growing its 15 priority brands (including Tylenol, Nicorette, Listerine, and Zyrtec) to drive future growth. We forecast the company to spend roughly 3% of sales in research and development, on par with some of its wide-moat competitors, to launch innovative products, specifically in digital consumer health. Recent examples include the Nicorette QuickMist SmartTrack spray and Zyrtec AllergyCast app.

Kenvue reported third-quarter earnings that were in line with our expectations. Total sales were up 3.3% year over year, largely thanks to price and mix, which contributed to 7.1% of total growth with 3.5% offset from volume loss. Management trimmed the top end of full-year sales guidance by 100 basis points after citing a soft outlook for the fourth quarter, driven by a weaker cold and flu season, as well as more challenging foreign exchange impact. We updated our near-term assumptions, but impacts from adjustments were not material and we maintain our fair value estimate of $27.50 per share.

Johnson & Johnson plans to appeal the bankruptcy court's rejection of the proposed $8.9 billion settlement regarding the talc cancer claims. While the pathway forward with close to 100,000 talc claimants is now less clear, we believe the total cost of resolving these claims is likely still close to the $8.9 billion established in the proposed settlement and already factored into our valuation. As a result, we don't expect any major changes to the firm's fair value estimate or wide moat rating.

Johnson & Johnson announced the next step in the split off of the consumer healthcare group Kenvue by offering at least 80.1% of the shares of Kenvue through an exchange offer. We don’t expect this step to have a major impact on J&J’s fair value estimate or wide moat rating. We also don’t expect any material changes to Kenvue’s fair value estimate or wide moat rating. We expect the Kenvue divestment will reduce the shares outstanding of J&J by approximately the value of the divested unit. The exchange offer follows an initial public offering of just over 10% of Kenvue in May. Within the exchange offering, J&J shareholders have the option to exchange all, some, or none of their shares for shares of Kenvue. With J&J offering an incentive of a 7% discount on Kenvue shares, we expect a high preference for Kenvue shares, especially as Kenvue is trading below our fair value estimate and J&J is trading just above our fair value estimate.

Kenvue is the world’s largest pure-play consumer health company by revenue, generating $15 billion in annual sales. Formerly known as Johnson & Johnson’s consumer segment, Kenvue spun off and went public in May 2023. We expect Kenvue, with the freedom to allocate capital and invest as a standalone entity, to mainly focus on growing its 15 priority brands (including Tylenol, Nicorette, Listerine, and Zyrtec) to drive future growth. We forecast the company to spend roughly 3% of sales in research and development, on par with some of its wide-moat competitors, to launch innovative products, specifically in digital consumer health. Recent examples include the Nicorette QuickMist SmartTrack spray and Zyrtec AllergyCast app.

Wide-moat Kenvue reported its first earnings as a standalone public company with solid results. Total sales were up 5.4%, mainly helped by another strong quarter from self-care which was up 12.2% and offset by slight depression in volume in other segments and unfavorable foreign currency. We continue to see Kenvue's robust pricing power and its ability to pass over elevated input costs to customers as value realization—which is defined by the company as impact from price and mix—was up nearly double digits on a consolidated level. We attribute this to Kenvue's strong intangible assets, driven by its portfolio of market-leading brands, including Tylenol, Listerine, and Band-Aid. We maintain our fair value estimate of $27.50 per share.

We are initiating coverage of Kenvue with a fair value estimate of $27.50 per share and a wide moat rating thanks to its brand reputation (intangible assets) and an entrenched standing with retailers and low consumer acquisition costs (cost advantage). Formerly known as Johnson & Johnson’s consumer segment, Kenvue is the world’s largest pure-play consumer health company by revenue, generating $15 billion in annual sales. Our forecast is underpinned by a five-year CAGR of sales of 4.2% and an annual margin expansion with operating margin reaching slightly over 20% by 2027.

Kenvue is the world’s largest pure-play consumer health company by revenue, generating $15 billion in annual sales. Formerly known as Johnson & Johnson’s consumer segment, Kenvue spun off and went public in May 2023. We expect Kenvue, with the freedom to allocate capital and invest as a standalone entity, to mainly focus on growing its 15 priority brands (including Tylenol, Nicorette, Listerine, and Zyrtec) to drive future growth. We forecast the company to spend roughly 3% of sales in research and development, on par with some of its wide-moat competitors, to launch innovative products, specifically in digital consumer health. Recent examples include Nicorette QuickMist SmartTrack and Zyrtec AllergyCast app.