Cost-Cutting Measures And Product Expansion Will Enhance Future Performance

Key Takeaways

• Strategic investments in brand development and innovation could drive revenue growth and align with increased consumer engagement efforts.
  
• Operational efficiencies and advanced analytics are expected to enhance margins and support scalable growth post-separation from J&J.
  
• Economic uncertainties and strategic challenges, including J&J transition costs and selective price reductions, threaten Kenvue's earnings, margins, and supply chain stability.

Catalysts

Operates as a consumer health company in the United States, Europe, the Middle East, Africa, Asia-Pacific, and Latin America.

• Kenvue is implementing significant cost-cutting measures, with plans for $350 million in annualized savings by 2026. This is expected to free up resources to invest more in brand growth, potentially improving net margins and earnings.
  
• The company plans to launch 40% more innovations in 2025 compared to 2024, which could drive revenue growth through premiumization, extensions into adjacencies, and attractive entry price points.
  
• Kenvue is increasing its investment in brand and product promotion, particularly through social media and influencer-led campaigns, which could lead to accelerated consumer engagement and eventually boost revenue.
  
• The integration of advanced data analytics and global centers of excellence for pricing and promotion is expected to enhance operational efficiency, potentially increasing net margins through better-informed financial decision-making.
  
• With the completion of their operational separation from J&J, Kenvue's focus on a more agile operating model and improved efficiencies can drive scalable growth and potentially enhance gross and operating margins.

Kenvue Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kenvue's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 13.9% in 3 years time.
• Analysts expect earnings to reach $2.3 billion (and earnings per share of $1.19) by about March 2028, up from $1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.3x on those 2028 earnings, down from 43.5x today. This future PE is lower than the current PE for the US Personal Products industry at 26.3x.
• Analysts expect the number of shares outstanding to decline by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.48%, as per the Simply Wall St company report.

Kenvue Future Earnings Per Share Growth

Risks

• The company's organic sales growth for 2024 was only 1.5%, which is below expectations due to factors like lower-than-expected incidences of cough, cold, and flu, leading to revenue pressures.
  
• Reduction in distributor orders and temporary distribution network disruption in China negatively impacted revenue, showing potential supply chain vulnerabilities.
  
• The company mentions a challenging external environment with economic uncertainties, geopolitical tensions, and a stronger dollar, which may further pressure earnings and margins.
  
• The transition from J&J and associated costs are still underway, potentially straining net margins if efficiencies are not fully realized as planned.
  
• Intention to reinvest in selective price reductions and trade spend could impact short-term revenue realization and require careful management to avoid squeezing net margins.

Valuation

• The analysts have a consensus price target of $23.803 for Kenvue based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $29.0, and the most bearish reporting a price target of just $21.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $16.6 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $23.42, the analyst price target of $23.8 is 1.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.