Johnson & Johnson (JNJ) is spinning off its consumer health business into a separate listing entity called Kenvue.
Kenvue sport an impressive portfolio of brands—including Tylenol, Neutrogena, Listerine, Johnson’s, Band-Aid, Aveeno, Zyrtec and Nicorette.
Kenvue has over ten brands achieving net sales exceeding $400 million. It holds five #1 brand positions globally across major categories, along with numerous #1 brand positions within our four regional markets.
Tylenol is the #1 Pain Care brand in the US and Canada.
Zyrtec is the #1 Allergy brand in the US.
Neutrogena is the #1 Acne brand in the US and Canada, #1 Facial Care (non-acne) brand in the US and #1 Sun Care brand in the US.
Listerine is the #1 Mouthwash brand in the US, Canada, China, India, Japan, Australia, South Korea, the Philippines, Indonesia, Malaysia and Thailand.
Johnson’s Baby is the #1 Baby Toiletries brand in the US, Canada, China, India, Australia, the Philippines, Malaysia and Thailand.
Kenvue generated $14.95 billion in global sales last year, about 15.7% of JNJ’s total.
But revenue declined slightly in 2022 by 0.5% when compared to 2021. All the subsegments have decline in revenue and JNJ attribute the fall mainly to competitive pressures in the market in most of the cases. The only growth was the over the counter medicine where it saw increased demand for cough and flu medication in the U.S. and China.
My pet-peeve is with the slowing growth and competitive nature of consumer health products. The big brands have penetrated markets all around the world and there are few places to get new sales. intense competition among these established brands such as Proctor & Gamble and Unilever has led to a market share struggle where no one seems to be lacking in marketing budget.
The rise of indie products and brands promoted by influencers poses a new threat to established players in the market. For example, Krave Beauty, a skincare label created by Korean-American YouTuber Liah Yoo, was estimated to have generated sales of between $25 to $50 million. Although these indie brands may have a relatively small market share, their cumulative impact can still pose a challenge for larger players. With the advent of social media, indie players now have a direct-to-consumer channel to sell their own brands, which has helped to fuel their growth and success.
Hence, don’t expect Kenvue to be a fast growing stock. Historically, growth has been around 3%, and such growth rate is expected to continue in the foreseeable future. This is in line with the overall GDP growth, indicating that the market is keeping pace with broader economic trends. While this may not be exciting, investors get stability in exchange.
One risk is JNJ’s ongoing legal battles related to allegations that its talc-based powder products caused cancer in users. In an effort to resolve the issue, JNJ has agreed to pay out $8.9 billion despite denying the allegations. This payout was significant enough to completely wipe out the earnings that JNJ generated in the first quarter of 2023.
JNJ has taken the responsible step of retaining liability for talc-related issues associated with products sold in the US and Canada, while Kenvue will be accountable for any liabilities arising from talc products sold elsewhere. While there is still some risk associated with this issue, it is relatively minimal outside of the US, where class action lawsuits are not typically possible. As such, Kenvue is unlikely to be significantly impacted by the ongoing talc saga.
Kenvue’s upcoming public offering is expected to generate at least $3.5 billion, with the company targeting a valuation of around $40 billion. As a result of the offering, JNJ would retain approximately 91% stake in the company.
This valuation is reasonable, with a price-to-earnings (PE) ratio of around 14x, which is comparable to other major players in the market such as Unilever (16x), but cheaper than Procter & Gamble (26x) and Colgate-Palmolive (36x). This indicates that Kenvue’s valuation is not exorbitant and is in line with industry standards.
Overall, Kenvue may be more appealing to conservative investors who are attracted to stocks like P&G and Coca-Cola, and who may also be impressed by Kenvue’s strong brand portfolio. However, for those investors who seek higher growth opportunities, Kenvue may not be the best fit. Value investors wouldn’t like it either considering it is trading at fair value.
