Kenvue: New Business, Optimized Portfolio, and Decades of Market Leadership Carve Out a Wide Moat

We are initiating coverage of Kenvue KVUE 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.

Results from the first quarter show Kenvue’s three segments posting high-single-digit sales growth solely from pricing, and we expect a similar trend for the remainder of the year, albeit the impact might slow as the year progresses. For 2024 onward, we expect pricing tailwinds to significantly come down and normalize to provide a low-single-digit contribution to sales growth. Macro trends such as an aging population and a premiumization of consumer healthcare products should provide tailwinds for Kenvue’s wide array of brands. We also expect Kenvue to benefit from an increasing digital investment (71% of company’s marketing spend in 2022 was digital versus 44% in 2019) as e-commerce sales continue to rise faster than in-person store sales.

We forecast an annual margin improvement for Kenvue driven by continued improvements in its supply chain and an increased efficiency in operation. Kenvue has been rationalizing its portfolio through a reduction in a number of stock keeping units and business selloffs (15 divestitures from 2016 to 2022) and now that most of this optimization is behind us, we expect a more agile product catalogue. We also expect cost savings from supply chain optimization initiatives as Kenvue dedicates roughly 60% of capital expenditures to automation and digitalization of its manufacturing and distribution network, improving end-to-end integration.