Kenvue Stock: Put This Wide-Moat Name on Your Watchlist

Kenvue KVUE is the world’s largest pure-play consumer health company by revenue, generating $15 billion in annual sales. The company spun off from Johnson & Johnson JNJ and came public in May. Now that it has the freedom to allocate capital and invest as a stand-alone entity, we expect Kenvue to focus on its 15 priority brands—including Tylenol, Nicorette, Listerine, and Zyrtec—to drive growth. Macro factors such as an aging population, the premiumization of consumer healthcare products, and growing emerging markets should provide tailwinds for Kenvue’s wide array of brands. We also expect Kenvue to benefit from increasing digital investment as e-commerce sales continue to rise faster than in-person store sales. We expect margin expansion from two channels: favorable pricing dynamics and improving supply chain efficiencies.

Key Morningstar Metrics for Kenvue

• Fair Value Estimate: $27.50
• Star Rating: 3 Stars
• Economic Moat Rating: Wide
• Uncertainty Rating: Medium

Economic Moat Rating

We believe the company’s strong brand reputation and customer loyalty as well as significant economies of scale should support economic profits for at least the next 20 years. Kenvue has five brands that generate over $1 billion in annual sales: Johnson’s, Neutrogena, Listerine, Tylenol, and Aveeno. It also has a number of brands that generate over $400 million in sales, including Nicorette, Zyrtec, Band-Aid, Benadryl, Motrin, and OGX. We believe Kenvue can maintain its leading share position and entrenched standing with retailers through product innovation, thanks to extensive research and development. We believe that through its impressive scale and global footprint, Kenvue has garnered favorable relationships with its suppliers and achieved significant economies of scale that smaller competitors are not able to achieve. Also, Kenvue has grown at the pace of or more quickly than the industry while spending less on advertising and marketing, which helps it post higher returns than its competitors.

Read more about Kenvue’s moat rating.

Fair Value Estimate for Kenvue Stock

Our fair value estimate of $27.50 per share is underpinned by our forecast of a five-year compound annual growth rate of 4.2% for revenue and operating margin reaching slightly over 20% by 2027. For 2023, we expect stronger-than-normal sales growth as Kenvue raises prices on its products to combat high input costs. For 2024 and onward, we expect pricing tailwinds to come down significantly and normalize to provide a low-single-digit contribution to sales growth. We forecast margin expansion to be driven by continued improvements in the supply chain and increased efficiency in operations through a more focused and lean portfolio. We expect Kenvue to spend roughly 3% of total sales on research and development, on par with some of its key competitors, to develop new products and improve existing ones to keep pace with evolving consumer trends.

Read more about Kenvue’s fair value estimate.

Risk and Uncertainty

While Kenvue maintains a leading position in many industries it operates in, barriers to entry are low, and some markets are susceptible to new competition. In an increasingly digital environment, a player can easily introduce new products without having to displace industry leaders from retail shelf space. However, we believe Kenvue can mostly protect itself against new entrants thanks to the long history of many of its brands as well as its entrenched relationships with retailers and consumers. J&J’s consumer segment faced serious litigation around Johnson’s baby powder, involving nearly 70,000 plaintiffs who claimed that the talc in the product caused cancer. In April, J&J reached a final settlement for $8.9 billion, paying claimants over 25 years. It also discontinued all talc-based Johnson’s powder and replaced it with cornstarch-based powder. Any future talc-related litigation will be fully handled by J&J with no impact on Kenvue.

Read more about Kenvue’s risk and uncertainty.

Kenvue Bulls Say

• With autonomy from its former parent, Kenvue can allocate resources to best fit its needs and expand its business.
• Macro drivers like an aging population and premiumization of healthcare will act as tailwinds for all of Kenvue’s brands.
• A continued focus on digital advertising and marketing will position the company to fend off new competitors in e-commerce.

Kenvue Bears Say

• As rising input costs put pressure on Kenvue to hike prices, consumers could start to seek cheaper options or private-label offerings.
• The personalization of health paves the way for smaller players to carve out a share of the market with bespoke offerings. Kenvue will have a tough time catering to these consumers with its megabrands.
• Talc litigation has caused considerable damage to J&J’s reputation, and it could be difficult for Kenvue to win back lost customers despite replacing talc with cornstarch.

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