Starboard Value, an activist investment group, has recently acquired a position in the consumer healthcare company Kenvue alongside its new $1 billion stake in Pfizer. The group plans to engage with Kenvue’s management to propose operational changes aimed at enhancing shareholder returns, following a 10.5% stock loss since the company’s spinoff from Johnson & Johnson in 2023.
This development holds several implications for investors, with an outlook that appears moderately optimistic. Kenvue is recognized for owning rights to well-known brands such as Neutrogena, Tylenol, Listerine, Band-Aid, Aveeno, and Zyrtec. Despite its standing, Starboard’s analysis indicates that Kenvue’s valuation and growth rate are lagging behind those of its peers. From 2019 to 2022, the company’s annual net sales increased at a compound annual growth rate of just 3.4%, compared to a 4.8% growth in its market. In 2023, the organic top-line growth rate was a mere 5%, falling short of management’s guidance.
Wall Street anticipates continued slower growth for Kenvue in the coming years. According to Starboard, Kenvue’s skin and beauty segment is growing significantly slower than that of its competitors, and it is losing market share. While Starboard has not yet detailed a precise plan, it suggests that enhancing Kenvue’s marketing capabilities to better align with consumer preferences, particularly in the underperforming segments, could be beneficial. Starboard is likely to provide more detailed recommendations in upcoming meetings with management.
Should Kenvue’s management implement these suggestions, Starboard believes the company’s growth could align with that of its peers, potentially improving stock valuation and enabling greater capital returns to shareholders through dividends and possibly share buybacks. Starboard remains optimistic about the business’s future potential despite current performance concerns.
However, there are risks associated with Starboard’s involvement. While their input could bring beneficial changes to Kenvue’s leadership and competitive stance, potential conflicts with management could arise, mirroring their current situation with Pfizer. Such conflicts may lead to calls for managerial changes, possibly sparking public disputes without necessarily impacting the share price.
Conversely, if Starboard’s proposals are accepted but negatively affect the company’s strategy, it might result in adverse performance outcomes. There’s no assurance that Starboard’s strategic recommendations will be successful, and the extent of potential damage from unsuccessful strategy shifts remains uncertain.
At present, there isn’t a strong incentive to invest in Kenvue stock, as it is unlikely that activists will dramatically increase growth in its current business line. While operational adjustments might mitigate bottom-line losses to some degree, significant earnings growth seems improbable without major new initiatives. Nonetheless, the activist bid may evolve, potentially strengthening the investment thesis in the near future.