Typically, delivering a strong earnings performance yields significant rewards in the capital market. Unfortunately, Johnson & Johnson (NYSE:JNJ) spinoff Kenvue (NYSE:KVUE) found out that occasionally, Wall Street can go the irrational route. Nonetheless, I believe shares are well-priced. Therefore, I am bullish on KVUE stock.
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Encouraging Data for KVUE Stock Despite the Volatility
At first glance, KVUE stock seems unusually risky. Last week, shares slipped by more than 4%. Since making its public market debut earlier this year, the security fell by 5.2%. Much of the red ink likely centers on the ongoing separation from Johnson & Johnson, which currently holds a stake of nearly 90% of KVUE. Still, the volatility shouldn’t cloud the encouraging fundamentals for Kenvue.
According to a CNBC report, the consumer health products provider posted revenue of $4.01 billion during its fiscal second quarter of 2023. This tally represented a 5.4% lift from the year-ago level. On the bottom line, the company reported net income of $430 million or 23 cents per share. Adjusted for non-recurring items, adjusted earnings per share came out to 32 cents.
Both figures beat consensus expectations, which called for EPS of 30 cents and revenue of $3.96 billion. Moreover, Kenvue disclosed sales growth for all three of its business units in Q2.
Even better for the long-term prospect of KVUE stock, Kenvue forecasts revenue growth by the end of this year to hit 4.5% to 5.5%. Further, management’s full-year adjusted earnings guidance stands at $1.26 to $1.31 per share. Prior to this disclosure, analysts anticipated the EPS outlook to land at $1.23.
Also, while analysts aren’t exactly pounding the table on KVUE stock, a select few recognize its potential upward mobility. In late May, Bank of America Securities analyst Anna Lizzul initiated coverage with a Buy rating. Recently, Lizzul reiterated the Buy rating with the same $30 price target despite KVUE absorbing some pain.
Kenvue Benefits from Social Normalization
Fundamentally, the present underperformance of KVUE stock ignores the shift in the underlying total addressable market. Back during the worst of the COVID-19 crisis, millions of people – both in the academic and professional realms – were physically isolated. Therefore, personal care products took a backseat because of the incentivization loss. Now, with these elements gradually returning to pre-pandemic norms, Kenvue’s addressable market practically expanded.
It’s not a pie-in-the-sky narrative for KVUE stock because you can see the financial impact. As stated above, all three of Kenvue’s business units – Self Care, Skin Care, and Beauty/Essential Personal Care – experienced top-line expansion. By logical deduction, the integration of people back into the physical domain warrants closer looks in the mirror. For those that may have let themselves go a bit, products like skin care should see increased demand.
Again, it’s not empty speculation. Kenvue CEO Thibaut Mongon reported that sunscreens – particularly under the Neutrogena brand – have performed “extremely well” so far in the summer season. Such commentary follows a logical framework, particularly because “revenge travel” sentiment still rings hot. Once the separation from Johnson & Johnson finalizes and the drama from the process subsides, investors will likely focus on the upshot and not just on what can go wrong.
And depending on how you classify Kenvue’s business, KVUE stock may offer a discount. Right now, the market prices shares at a forward (projected) earnings multiple of about 19. This ranks noticeably lower than the healthcare product sector’s average forward multiple of 43.15.
Consumer Behavioral Pivot Also Helps Kenvue
As investors enter unchartered economic waters, a critical consumer behavioral pivot may also help Kenvue. Essentially, as circumstances such as layoffs materialize, people may cut discretionary purchases and save their funds for necessary goods.
Interestingly, Mongon noticed that Kenvue may be a beneficiary of the aforementioned behavioral pivot. “While consumers may be trading down in more discretionary and traditional staple categories, we have not seen this dynamic in our portfolio,” the head executive remarked during the Q2 conference call.
Is KVUE Stock a Buy, According to Analysts?
Turning to Wall Street, KVUE stock has a Moderate Buy consensus rating based on three Buys, six Holds, and zero Sell ratings. The average KVUE stock price target is $28.33, implying 12.8% upside potential.
The Takeaway: KVUE Stock is a Deal in the Making
Although the current crimson shade doesn’t reflect it, KVUE stock is a winner. Once the drama associated with its separation from Johnson & Johnson fades, investors will likely focus on the positives. As management demonstrated, the unique aftershocks of the COVID-19 crisis yielded strong demand for Kenvue products. As society continues to normalize, KVUE will likely justify its Moderate Buy consensus rating.
