Starboard Value, the activist investing group that's making waves thanks to its new $1 billion stake in Pfizer, now also has a position in the consumer healthcare business Kenvue (KVUE +0.00%). The group will seek to engage with management and propose changes to the company's operations with the aim of unlocking better returns for shareholders than the stock's 10.5% loss since its spinoff from Johnson & Johnson in 2023.
The activist's stake carries a handful of implications that are important for investors to understand. But at this early stage, the outlook appears to be moderately optimistic. Let's explore why.
NYSE: KVUE
Key Data Points
Could this be a new tailwind?
Kenvue is a notable healthcare player because it owns the rights to many common brands, including Neutrogena, Tylenol, Listerine, Band-Aid, Aveeno, Zyrtec, and others.
But as Starboard pointed out in its presentation about the stock, its valuation and growth rate are both lower than those of its peers. From 2019 through 2022, when it was still a part of Johnson & Johnson, its annual net sales grew at a compound annual rate of just 3.4%, whereas its market grew at a rate of 4.8%. In 2023, its organic top-line growth rate was just 5%, lower than what management had initially indicated in its guidance.
Wall Street's expectations appear to be that the company's slower-than-average growth is going to continue over the next few years. The problem in Starboard's view is that Kenvue's skin and beauty segment is expanding significantly more slowly than the same segment of its peers, and its market share is decreasing.
While the activists didn't give a concrete game plan yet, their prescription is to improve Kenvue's marketing capabilities to make them more responsive to consumer preferences across the board, but especially in that underperforming segment. The group likely has more granular suggestions to share with management, and they will probably soon meet.
If management adopts their ideas, Starboard thinks that Kenvue's pace of growth could improve to at least match that of its direct competitors. This, in turn, should improve the valuation of the stock and pave the way for returning more capital to shareholders via the dividend and perhaps share buybacks as well.
So it's safe to say that Starboard sees a bullish future for this business, even if it isn't performing up to its standards now.
There's a risk here too
At the moment, the prospect of Starboard guiding Kenvue toward better performance for shareholders is encouraging. Having new ideas added to the C-suite can make the business more competitive, even if most of the new suggestions aren't ultimately adopted. So far, the market's response to the activist's stake has been favorable.
But there's now a risk that the activists will publicly clash with management, as they are doing with their recent investment in Pfizer. They may even call for top leaders to be replaced, which would set the stage for a broader conflict between shareholders and management. That could generate some bad PR, but it might not have much of an actual impact on the share price if the fight is inconclusive.
On the other hand, it's also possible that Starboard's proposals will be embraced by management, and lead to a decline in the company's performance as a result of altering its strategy in some disadvantageous way. After all, there's no guarantee that Starboard's prescriptions to improve performance are infallible. It's unclear how bad the damage might ultimately be in a case of a failed pivot or an inept attempt at making operational changes.
For now, there is not a compelling reason to invest in Kenvue stock. It is very unlikely that the activists will be able to significantly increase its slow pace of top-line growth even if they get their way, given the line of business that the company is in. And while they may be able to implement changes that stem the bottom-line losses a bit, which would be worthwhile, it's still hard to see earnings growing with gusto anytime soon without launching major new initiatives.
But that could happen. So keep an eye on this one to see how the activist bid plays out. The thesis for investing could potentially get a lot stronger relatively soon.
