KVUE

Kenvue is the Johnson & Johnson consumerhealth carveout: a global portfolio anchored by Self Care (Tylenol, Motrin, Zyrtec, Imodium, Benadryl, Sudafed), Essential Health (Listerine, BandAid/Johnson's, feminine care) and Skin Health & Beauty (Neutrogena, Aveeno, Clean & Clear, regional dermacosmetic labels). The three segments together generated $15.455bn of 2024 net sales; reported operating income was $1.841bn (11.9% margin) affected by intangible impairments, while adjusted operating income was $3.328bn (21.5% margin), with gross margin at 58.0% (+200 bps year over year).

At a spot share price around $15, and 1.919bn shares outstanding as of August 1, 2025, the market cap is roughly $29bn. Net debt sits near $7.5bn (total debt ~$8.6bn, cash ~$1.1bn as of Q2), implying an enterprise value around $36bn. The company is investmentgrade (S&P 'A' affirmed March 2025), pays a quarterly dividend of $0.2075 and has a modest antidilution buyback authorization originally sized at 27m shares (16.9m repurchased cumulatively by Q2 2025). On 2025 guidance of $1.00$1.05, the stock trades near 1415x forward EPS with a 5%+ dividend yield.

Where could pricing power plausibly exist? In Self Care OTC analgesics and allergy (brand trust and physician/pharmacist endorsement underpin low elasticity), in oral care (Listerine's clinical claims support premiumization), and in dermaskincare lines when innovation is visible on the shelf. These are classic staples categories where durable incumbents monetize brand equity through net revenue management and promo disciplinegross margin resilience comes from productivity and mix, not just list price. The sector's playbookprice/mix through an inputcost cycle, then promo normalization as volumes reaccelerateis the right lens here.

Setup and recent history matter. Postspin, Kenvue digested separation complexity, exited transition service agreements and absorbed inflation shocks while holding list prices. By 2024, gross margins inflected on supplychain productivity ("Our Vue Forward"), but Skin Health & Beauty stumbled on execution and category softness, and Self Care faced a weak cold/allergy season and the phenylephrine debate. 2025 guidance aims for flat to slightly positive sales with improved adjusted margins, acknowledging FX drag and tactical price investments to protect share.

There are several structural frictions. First, the holderbase transition from a parent conglomerate to a pureplay staples stock, with technical supply from the 2023 exchange offer and subsequent index reshuffling, often creates a prolonged "who owns it?" period and underweights by qualitygrowth funds. Second, the company's adjusted vs reported gap (impairments, separation and restructuring charges) muddies screens that many quants and generalists use, making the P/E look optically high in some snapshots. Third, litigation headlinesespecially the U.K. talc filing naming Kenvue UK last weekcan trigger indiscriminate derisking by funds with low tolerance for binary legal overhangs, even though U.S./Canada talc liabilities are explicitly retained and indemnified by Johnson & Johnson. Finally, activist involvement has created a "sumoftheparts" narrative that is not yet matched by executed transactions; process uncertainty depresses multiples until announcements land.

Consumerhealth runs a familiar cycle: inputcost shock, price up with lag, volumes wobble, then commodities ease and margins rebuild as promotions normalize and volumes recover. Kenvue's 20242025 bridge fits this template: price/mix carryover helped, gross margin expanded +200 bps in 2024, and adjusted OI margin held above 21% despite heavier brand investment. In 1H25, net sales were $7.580bn (0.8% reported, +0.9% organic), with Self Care down in volume on a weak allergy/sun season, offset by Essential Health. The company still guided to FY25 adjusted operating margin improvement, consistent with the sector playbook of rebuilding profitability after the inflation shock.

Regulation is a live factor in Self Care. The FDA moved in November 2024 to propose removing oral phenylephrine from OTC decongestant monographs, and large retailers voluntarily pulled PEbased SKUs in 2023; this pushes some demand to pseudoephedrine (behindthecounter) and to nondecongestant cold remedies. In my model, PE reformulation and SKU culling are a lowsingledigit headwind to Self Care net sales in the next twelve months but are not thesisdefining for group EBIT.

Leadership turnover raises eyebrows but also resets expectations. In July 2025, the board replaced the CEO and formed a strategic review committee advised by Centerview and McKinsey, explicitly considering portfolio optimization. Independent reporting indicates Kenvue is evaluating sales of underperforming Skin Health & Beauty brands while retaining hero assets like Neutrogena and Aveeno; the company's August update reiterated the review is "ongoing." This makes sense: pruning tail SKUs and complexity is standard playbook in staples, often improving service levels, promo ROI and workingcapital turns.

The balance sheet is investmentgrade and conservative for a consumerhealth name. As of Q2 2025: total debt ~$8.610bn, cash ~$1.070bn (net ~$7.5bn); interest expense in 2024 was $378m, implying ~5x coverage on reported EBIT and nearly ~9x on adjusted EBITample room to fund the dividend and modest buybacks while reducing gross leverage. Shares outstanding were ~1.919bn on Aug 1, 2025; Kenvue has been repurchasing small amounts (16.9m cumulative shares through Q2 under a 27mshare program) primarily to offset dilution. The quarterly dividend was raised to $0.2075 in July, a ~5%+ forward yield at the current price, well covered by throughcycle free cash flow in my base case.

Triangulating valuation: at ~$15, the equity is ~1415x the midpoint of 2025 EPS guidance ($1.00$1.05). On an EV/EBIT basis, using 2024 reported EBIT ($1.841bn) gives ~1920x, while using the company's 2024 adjusted EBIT ($3.328bn) gives ~11xthe right answer for underwriting is "somewhere between," given recurring amortization and real restructuring cash costs. For staples, P/E and EV/EBIT are the appropriate anchors; I use P/E for the 12month horizon and EV/EBIT to sanitycheck the embedded margin/FCF profile.

Base case (55%): I assume FY25 net sales roughly flat (1% to +1% consistent with guidance), a ~50100 bps improvement in adjusted operating margin versus 2024 driven by productivity and mix, and adjusted EPS at $1.05. I do not assume a sale of Neutrogena/Aveeno; I do assume a $0.50.8bn disposal of noncore Skin Health & Beauty assets in H1 2026 is announced within our horizon, with proceeds earmarked for debt reduction and antidilution buybacks. On the P&L, that disposal would cut a de minimis amount of 2025 EBIT (little to no contribution assumed in the year) while lowering 2026 interest expense by ~$2540m pretax, worth roughly 12 cents of EPS annualized on the current share count. At a 16x multiple on $1.05 plus an $0.83 dividend, I get ~$18 fair value and a lowteens total return.

Bull case (20%): The strategic review produces a clearer portfolio architecture earlier (e.g., sale of several underperforming brands totaling >$1bn proceeds), Self Care volumes normalize on a more typical cold/allergy season, and the company executes on "Our Vue Forward" savings without stepping up promos. Adjusted operating margin approaches or slightly tops the 2024 adjusted level (H21.522%), and I credit $1.10 EPS. On modest rerating to 18x (still a discount to bluechip staples leaders) and the dividend, I get $2022.

Bear case (25%): A noisier legal tape from U.K. talc suits plus a weak winter virus season keeps Self Care volumes soft, forcing higher promotional intensity into summer categories. FDA finalizes phenylephrine removal faster than expected, creating transient shelf disruption. Adjusted EPS lands near $1.00; the multiple compresses to ~12x given sentiment, and I haircut EV for litigation overhang. That yields ~$12 downside. Notably, U.S./Canada talc liabilities remain indemnified by J&J per the separation agreement; the incremental risk here is restricted to exU.S. exposure where Kenvue acknowledges responsibility.

The prevailing narrative is that Self Care growth is durably impaired (phenylephrine, seasonality, pricing elasticity), Skin Health & Beauty is a valuetrap (recalls, benzene headlines in prior years, tough competition), and that a CEO exit amid activism signals deeper problems rather than a deliberate pivot. My read of the facts is less dire. Self Care's core profit enginesanalgesics and allergyare not based on phenylephrine, and the category has historically reaccelerated as promos normalize; 2024 gross margin expansion and 2025 marginimprovement guidance are consistent with a standard staples rebuild. Skin Health & Beauty can be simplified without sacrificing the crown jewels; the board's process and external reporting point toward pruning tail assets, not selling the family silver. The leadership change plus a veteran CFO from Kellanova signal a tighter execution agenda rather than strategic drift.

The 2024 reported/adjusted gap is driven by amortization of acquired intangibles ($269m), separation and restructuring charges (~$517m combined), and a $578m noncash impairment, which we should neither ignore nor capitalize forever. The right approach in staples is to focus on the grosstonet bridge, the promo rate, and the durability of productivity/mix leversthen translate to EV/EBIT with a sober view on what is truly recurring. The primer's caution applies: use P/E and EV/EBIT as primary frames, triangulate with cash conversion, and avoid overweighting onetime "adjusted" boosts. On cash, 2024 CFO was $1.769bn, capex $434m, and dividends paid $1.552bn; workingcapital swing depressed coverage, but throughcycle FCF should exceed the dividend under my base case as margin rebuild continues.

Acetaminophen/autism litigation in the federal MDL was dismissed in 2024 after exclusion of the plaintiffs' experts, and appeals have dragged on without resolution; more recently, political noise created headlines, but major medical bodies and the WHO have pushed back on claimed links. The relevant investor point: no new quantified liability has emerged for Kenvue from these proceedings to date, and 2025 guidance already assumes higher brand investment and some regulatory friction in Self Care. On talc, the separation agreement is clear: J&J retained and indemnifies U.S./Canada talc liabilities; Kenvue remains responsible for exU.S. claims, and the U.K. filing is precisely that. I treat U.K. proceedings as a tail risk that may affect sentiment more than P&L within twelve months, with any ultimate damages years away and likely insurable/defensible; but it is an honest risk to watch.

If Q4Q1 seasonals again show weak Self Care volumes with deepening promo reliancecontrary to staples' usual cycle of margin rebuildthen the earnings power I underwrite would be too high. If the strategic review stalls or culminates in selling core assets at low multiples, the "quality and focus" bull case evaporates. And if exU.S. talc cases develop into nearterm cash calls or adverse rulings with quantifiable liabilities inside our horizon, I would move to neutral or short depending on size.

At today's price and with a 5%+ dividend as carry, Kenvue offers a clean, dated catalyst path (quarterly prints with margin bridges, potential divestiture announcements from the strategic review) and a sensible operating playbook consistent with staplesector base rates. The legal drumbeat will remain noisy, but the indemnity structure and process design constrain the downside over the next twelve months. I am long for a lowteens expected total return with upside skew if the board executes on portfolio pruning and the operating discipline translates into a tighter P&L.