If you've ever been to a convenience store, odds are that you've encountered products sold by Kenvue (KVUE -0.88%). If that name doesn't sound familiar, it might be because until recently Kenvue's products were part of a larger conglomerate, Johnson & Johnson.
Earlier this year, Johnson & Johnson spun off its consumer health business, home to recognizable brands including Aveeno, Listerine, Neutrogena, Tylenol, and Zyrtec.
Kenvue just held its first earnings report as a stand-alone public company, and beat Wall Street expectations on both the top and bottom lines. Although its history as an independent entity is limited, there are some reasons why investors may want to scoop some shares up in the consumer giant.
What is a spinoff?
From time to time, corporations may undergo organizational restructuring. Sometimes a business may recognize that one of its segments is non-core relative to its other operating segments. As a result, the company may try to divest this asset and sell it to a competitive buyer.
On the other hand, a company may eventually reach a point in its lifecycle where it is struggling to grow, yet has several strategic directions it could go with the right leadership in place. Earlier this year, e-commerce and cloud computing giant Alibaba Group found itself at the center of this dynamic, and announced that it will be splitting into six different companies.
In recent memory, two notable spinoffs are Otis Worldwide and Carrier Global. The chart below compares each company's stock performance over the last three years against the S&P 500. While the sample size among this cohort is small, investors can see that both spinoffs have outperformed the broader markets. Although this should not be taken as an indication of future spinoff performances, it shows that divestitures can be winning investments.
What does the company's performance look like?
For the quarter ended July 2, Kenvue reported total revenue of $4 billion, which represented 5.4% growth year over year. Kenvue segments its revenue into three categories: self care, skin health and beauty, and essential health. On a year-to-date basis, Kenvue's revenue is up 7% year over year with self care leading the charge.
While these trends look impressive, one thing investors should keep in mind with consumer goods is that these companies oftentimes experience seasonal fluctuations. For example, Kenvue explained that the self care segment benefited during the first half of the year due to more pronounced cold and flu cases.
Despite these fluctuations, there are other reasons Kenvue makes a compelling investment. As part of the earnings call, management guided toward revenue growth for fiscal 2023 to be in the range of 4.5% to 5.5%, and declared a dividend.
While this revenue growth profile may not appear attractive at first, investors should remember to compare Kenvue to its competitors.
Image Source: Getty Images.
How does the stock compare to competition?
To get a sense of Kenvue's performance, I will compare the company against Procter & Gamble as well as Colgate-Palmolive. For the quarter ended June 30, Colgate-Palmolive reported 7.5% revenue growth and guided for full-year 2023 top-line growth of 5% to 8%. On the other hand, Procter & Gamble, whose fiscal year ends in June, reported 2% net sales growth for fiscal 2023 and guided toward 3% to 4% revenue growth in fiscal 2024.
When it comes to valuation, Kenvue stock currently trades for a forward price-to-earnings (P/E) ratio of 18 and a price-to-sales (P/S) ratio of 2.9. By contrast, Procter & Gamble trades at a forward P/E of nearly 25 and a P/S of 4.8. Colgate-Palmolive also trades at a forward P/E of nearly 25 and a P/S of 3.3.
Although Procter & Gamble and Colgate-Palmolive are larger, more mature companies compared to Kenvue, the general takeaway is that each stock is trading for a noticeable premium compared to the Johnson & Johnson spinoff, despite relatively similar growth profiles.
When it comes to Kenvue stock, investors should be thinking about the long term. While this company is not exactly a high-flying technology software business, its products are staples of everyday needs. The combination of a positive financial outlook and dividend, coupled with its discounted valuation to peers, makes the stock a compelling buy at this price point.
