Cabot Turnaround Letter Issue: March 26, 2025

Kenvue (KVUE): More than a Band-Aid Fix

In uncertain times like these, it’s only natural that defensive-minded investors are gravitating to healthcare stocks. After all, this space is characterized by consistent demand for essential products and services that millions rely on, regardless of the state of the economy. (Additionally, many of the companies in this category offer dividends that can be considered quite attractive during market sell-offs.)

While the sector itself has only lately returned to favor, a number of consumer-facing healthcare companies remain out of Wall Street’s good graces and under the public’s radar—including some which provide critical staple products for the everyday needs of consumers.

One of those companies happens to provide products that most of us take for granted, but which are necessities nonetheless. The company in question is Kenvue (KVUE), which bills itself as “the world’s largest pure-play consumer health company by revenue” and which provides some of the world’s most famous and widely used over-the-counter consumer healthcare products.

Among its more recognizable brands are Band-Aid brand bandages, Tylenol and Motrin pain relief products, Listerine mouthwash, Neosporin antibiotic ointment, and Johnson’s baby products. Other brands include: the Neutrogena face and body care line, Nicorette smoking cessation products, Benadryl and Benylin cough and cold relief, Visine eye care, Rogaine hair regrowth treatment, plus a host of other OTC healthcare products across several categories.

The result of a Johnson & Johnson (JNJ) spinoff in May 2023, Kenvue was formed to allow its former parent company to focus on streamlining its primary operations (medicines and medical devices) while allowing Kenvue to focus on consumer products. The idea behind the spinoff—which CNBC described as “the biggest shake-up in J&J’s nearly 140-year history”—was to make both companies more “agile and flexible” (in J&J’s words) in their respective markets.

Kenvue’s stated mission is to deliver innovative care solutions to customers and consumers around the world, and by virtue of its robust portfolio of well-known, top-selling products, it appears to have a clear path to fulfilling that mission. The path to reaching that goal, however, has been anything but smooth.

Shortly after its IPO in May 2023, Kenvue’s stock plummeted, driven partly by concerns over the company’s exposure to a class action lawsuit surrounding one of its key products, Tylenol. By the end of that year, however, the case against Kenvue collapsed after a summary judgment ruled in the firm’s favor in the suit, which alleged that prenatal exposure to Tylenol may contribute to autism or attention-deficit hyperactivity disorder. Specifically, the judge ruled that

“none of the five expert witnesses offered by the plaintiffs to testify that [Tylenol] could cause ADHD and ASD had used a sound scientific methodology and could not testify at trial.”

While this was viewed by investors as a major victory for Kenvue—and indeed was a catalyst for reversing the stock’s decline—it should be noted that the lawsuit remains ongoing with an appeal currently pending, with an additional case in California scheduled for trial in April.

That said, the ongoing lawsuits aren’t an immediate concern for institutional investors, which are focusing more on Kenvue’s opportunity in Tylenol as global sales of acetaminophen, the drug’s active ingredient, are projected to increase by nearly 70% between 2022 and 2032, with compound annual growth of 5% projected for that 10-year stretch.

But Tylenol isn’t Kenvue’s major focus going forward. A major part of its growth strategy involves a renewed emphasis on promoting its exceptionally diverse and recognizable brand portfolio. Indeed, the top brass is actively investing in the brands by way of new and innovative marketing campaigns and increased ad spending. The company believes the payoff to these strategies will be higher revenue and margin growth, as well as enhanced pricing power and profitability in the next several years.

Another key component of the turnaround strategy involves cutting costs, which management believes can achieve $350 million in annualized savings by next year. Kenvue believes that by removing superfluous overhead costs and streamlining operations, the resultant savings can be reinvested in the new marketing strategies, as well as in new product development, eventually bringing about the targeted market share increases and margin expansion.

Key to the turnaround’s success is the latter metric. As one analyst observed, “The potential uplift in EBITDA margin is viewed as a crucial factor that could reverse recent financial headwinds and re-establish confidence among dividend investors and long-term shareholders.” To that end, the company recently unveiled its plans for 2025, which involve several measures it sees as contributing to building new momentum across the portfolio.

According to management, Kenvue will launch 40% more innovation compared to 2024, which it expects to strengthen the portfolio through “premiumization, extension into adjacencies and attractive entry price points.” It further expects net distribution gains this year, driven by a “healthy innovation lineup” and strengthened retailer partnerships, and which it sees leading to higher prominence across its brands.

Moreover, the firm has plans to support the brands by utilizing more competitive trade and marketing investments, as well as stronger partnerships with celebrities, influencers and healthcare professionals. On the advertising front, Kenvue has streamlined its roster of ad agencies and has recently launched a new global content factory, which it says “will drive more impactful content with greater efficiencies.”

The company isn’t without its challenges, however, and has lately acknowledged facing currency-related headwinds for 2025, namely a strong U.S. dollar (which is impacting profits from overseas sales), weak demand for some of its key products, including some of its cold and cough products like Benadryl, and the admittedly vague-sounding need to “navigate a dynamic external environment” in the company’s own words.

Additionally, the company faces distribution challenges, which could be impacting its ability to effectively get its products to customers, particularly in China, where it has not only a growing presence as a seller, but as a manufacturer in that country. In particular, the company recently experienced temporary disruption in its distribution network for essential health and skin health brands, which it said was driven by secondary distributors who faced liquidity issues.

Then there’s the ongoing problem faced by Kenvue relating to the legacy of litigation involving a key infant care product, namely talcum powder. In particular, he product has been the source of lawsuits over the claim that its talc-based baby powder caused cancer, and has been ordered to pay damages in some cases (the company inherited these liabilities after its separation from J&J). However, the company no longer sells talc-based powder, but has instead transitioned to a cornstarch-based formula for global baby powder sales.

To address these overhangs in the business and help “right the ship,” the well-known activist investor hedge fund, Starboard Value LP, entered the picture. The company took a “sizable stake” (around 22 million shares, or 1.1% of Kenvue’s business) in Kenvue last October after publicly expressing concerns about the company’s post-spinoff performance.

While Starboard acknowledged that the firm’s spinoff from J&J made sense (as a consumer health business is notably distinct from a medical device producer), it sees an opportunity to help Kenvue expand and enhance its sales and marketing strategies, as well as increase new product development. It further believes Kenvue’s skin health and beauty product segment can improve execution by improving corporate culture and, more importantly, by addressing recent distribution challenges in China and other international markets.

Earlier this month, Kenvue settled a proxy war with Starboard, which was allowed to add three new directors to the firm’s board. Along with Starboard’s Jeff Smith, one of those new directors is Erica Mann, former head of Bayer’s consumer health division, while the other is Sarah Hofstetter, whose expertise lies in the field of digital marketing and e-commerce performance. Both directors have extensive experience in the strategies that Kenvue will need to execute upon to meet its growth objectives.

Arguably for investors, however, the most important takeaway here is the added confidence of having a successful activist investor like Starboard at the helm to guide Kenvue’s turnaround. And with Starboard’s management believing that Kenvue has “the best brand portfolio in its peer group,” it should make for an easier diagnosis of the company’s internal problems and the resulting execution of its strategic initiatives.

Starboard also believes that Kenvue’s product categories are “more defensible than peers with less threat from private label alternatives.” In other words, it sees products like Tylenol and Listerine having stronger brand recognition that fellow competitors like Procter & Gamble or Colgate-Palmolive. Plus, private labels own only a 6% share of Kenvue’s product categories compared to the peer median of 10%.

Moreover, it believes Kenvue’s product categories are supported by attractive end markets that offer plentiful opportunities for expansion and enhanced advertising strategies. It also sees “structural tailwinds” providing a foundation for consistent revenue growth into 2030, led by Pain Care, Face & Body Care, Oral Care and Baby Care.

Starboard further anticipated that each of these factors—especially the brand recognition and lower private label threat—point to Kenvue’s stock being undervalued relative to industry peers, which it says makes the company’s turnaround success all the more likely. In view of all the factors mentioned here, I heartily agree with Starboard’s assessment of Kenvue. Accordingly, I believe Kenvue is a worthy addition to the portfolio—with the added attraction of the company’s defensive nature in an uncertain economic environment.

Recommendations

Purchase Recommendation: Kenvue (KVUE)

199 Grandview Road
Skillman, NJ 08558
Web Site: http://www.kenvue.com

Symbol: KVUE
Market Cap: $45 Billion
Category: Large-Cap
Business: Consumer Health
Revenues (2025e): $15.5 Billion
Earnings (2025e): $2.2 Billion
3/26/25 Price: $23.30
52-Week Range: $17.70-$24.50
Dividend Yield: 3.5%
Price target: $30

Background:

As mentioned above, KVUE came public in May 2023 at 25.50 a share. In an all-too-typical post-IPO performance, the stock turned tail shortly afterward and swooned over the next six months before bottoming at 18, shedding 30% of its value in the process.

The summary judgement of the Tylenol case in Kenvue’s favor in November served as the initial catalyst for the rebound that followed into early 2024. The resulting rally was short-lived, however, as the shares returned to the prior low over the next several months.

From there, the stock revived starting last summer and soared to a high of around 24 before meeting with resistance. As of this writing, KVUE is under this key level, which has been tested twice in recent months without being able to overcome it. I believe the stock can successfully overcome this resistance and eventually return not only to the IPO price, but go on to make new highs in view of the positive fundamental catalysts at play, as mentioned above.

As alluded to earlier, the company’s dividend is a major attraction (currently a 3.5% yield), which some analysts believe could be on par with the 10-year Treasury yield in a couple of years’ time.

The window for this potential turnaround is roughly six-to-12 months, and I’m placing an upside target for this stock at 30.

Analysis:

Admittedly, several of Kenvue’s financial metrics, including price/earnings, are above that of sector peers. The stock also isn’t the bargain it was a year ago due to the share price strength of recent months. However, the stock has other fundamental factors in its favor, including cash flows that have been described by a recent Morningstar analysis as being “fairly predictable” with a history of strong capital returns that it called “particularly remarkable.”

Kenvue is a recent addition to the illustrious “Dividend Aristocrats” list due to its record of consistently increasing its dividend. And as the world’s largest pure-play consumer health company by annual sales (with $16 billion in total sales last year), the stability of revenues is certainly there, which adds to the allure.

The company is also aggressively paying down debt, which should further increase the amount of capital it can return to shareholders going forward. It also has around $200 million more in Depreciation and Amortization expenses compared to its CAPEX which, in the words of analyst Brett Green, makes “for an established brand and efficient business” while helping enhance free cash flow production to pay down debt.

In terms of total long-term debt, Kenvue had $8.6 billion in debt at the end of Q4, a slight increase from $8.3 billion from a year ago. However, the firm’s $45 billion market cap dwarfs this in comparison, and its liquidity profile is strong with $1.1 billion in cash & cash equivalents at last year’s end.

Another factor that could surprise investors this year is Kenvue’s consumer sales in China. Kenvue has four plants in China, with over 90% of its products sold in China manufactured locally. Depressed consumer spending in that nation last year resulted in a reduction in customer orders there, but China’s recent $41 billion stimulus plan to increase domestic consumption should bode well for Kenvue’s China business. (Indeed, preliminary sales data from China indicate higher sales across several retail categories since the stimulus rolled out, increasing 4% overall in January-February.)

On the financial front, analysts have set an exceptionally low bar for Kenvue for 2025, with total revenue and per-share earnings expected to remain essentially flat on a year-on-year basis. Those low estimates should prove easy to beat, especially if the firm’s overseas distribution problems are resolved (as expected)—and more particularly—if inflation shows any signs of moderating (which a slowdown in domestic economic growth will almost certainly bring about).

And as ProShares global investment strategist Simeon Hyman recently observed:

“During such turbulent times, a wide variety of stocks that have been left behind may deliver short periods of outperformance. But for investors looking for sustained outperformance potential, companies that maintain strong fundamentals even when their stock prices lag could be a better opportunity—they become quality that’s on sale.”

Owning the stocks in the S&P 500 Dividend Aristocrats index “fit this bill,” he said. On this score, the index’s top 10 constituents by weighting and ranked by a Seeking Alpha quant rating include Kenvue (rated at number seven).

All told, I’m recommending that we add KVUE to the portfolio by virtue of its dividend strength and its above-average potential to recover to at least its IPO price (and likely higher) within the coming year. BUY

Other Ratings Changes:

I recommend that we take a one-quarter profit in Paramount Global (PARA). The stock is up 15% since our initial recommendation back in December, and I think this is a good place to take a partial profit as the stock has lately been marking time while awaiting developments in the Skydance deal. We’ll maintain the remaining three-quarters position with a Hold Rating. SELL A QUARTER

The chief analyst of the Cabot Turnaround Letter does not yet personally hold shares of every company on the Current Recommendations List, but that will change over time subject to the following guidelines. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may currently hold and may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.

Performance

The following tables show the performance of all our currently active recommendations, plus recently closed out recommendations.

Most Recent Closed-Out Recommendations

Notes to ratings:
1. Based on market capitalization on the Recommendation date.
2. Total return includes price changes and dividends, with adjustments as necessary for stock splits and mergers.
* Indicates mid-month change in Recommendation rating. For Sells, price and returns are as-of the Sell date.
** BNT return includes spin-off value in BAM shares.
*** GE total return includes spin-off value of GEHC shares at January 6, 2023 closing price to reflect our sale.
**** Indicates a partial sell.

The next Cabot Turnaround Letter will be published on April 30, 2025.

Copyright © 2025. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.