(Bloomberg) -- Kenvue Inc. looked like a winner following its May spinoff from Johnson & Johnson in the year’s biggest IPO. But just a few weeks after the stock’s initial surge, Wall Street is urging investors to avoid the shares.
Eight of the 11 analysts that cover the consumer health company advise clients against buying shares, an anomaly on the Street, which is in the business of selling stock by focusing on what’s seen as an appropriate valuation.
The lackluster response centers on whether the company can deliver strong results with its iconic brands like Tylenol and Listerine facing softer consumer spending habits after a rush in demand during the pandemic.
While strong brand equity paired with a high market share and the potential for strategic deals may justify a higher valuation, there are concerns around growth, said Deutsche Bank’s Steve Powers, who launched coverage with a neutral rating. In addition, J&J retaining a 90% stake in Kenvue after the spinoff will remain an overhang until those shares are sold into the market, he wrote.
Shares have slumped about 9% from a peak three weeks ago after rallying 22% in its first session on the back of a split from the health-care giant, which came with a $4.4 billion initial public offering on May 3.
The drop is emblematic of the mixed reception for stocks that have gone public this year. Solar power tracking company NEXTracker Inc. shares have jumped more than 30% since a strong debut while biopharma Acelyrin Inc. has erased more than one-quarter of its value after a first day pop.
The bulk of Kenvue’s initial gains are credited to its valuation catching up to the likes of Procter & Gamble Co., analysts agreed. But delivering growth will be the driving factor in the stock’s success going forward. The debate centers around management’s ability to run the company better as a standalone firm, wrote Citigroup Inc. analyst Filippo Falorni, who has a neutral rating on Kenvue.
And then there are the potential legal headaches. While J&J has liabilities related to lawsuits alleging talc in its baby powder cause cancer in the US and Canada, Kenvue retains exposure to baby powder products sold outside the US and Canada, presenting another risk, analysts said.
Still, after a month of trading, the company’s 14% gain places it among the four best-performing IPOs in the US this year that raised more than $50 million, data compiled by Bloomberg show.
For Kenvue optimists like JPMorgan Chase & Co.’s Andrea Teixeira, the appeal is the company’s ability to accelerate growth with 10 brands that had net sales greater than $400 million in 2022.
As Kenvue builds a track record and performs after the distribution of J&J shares, the stock “should trade with the major-league, high-quality multinationals that have defensive sales, compounding growth and solid free cash flow conversion,” Teixeira wrote. “Kenvue benefits from participating in large categories where reliability and performance matter for consumers.”
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