Acuvue

Acuvue is a world-leading brand of disposable contact lenses, manufactured by the Vision Care division of Johnson & Johnson (J&J). While you can't buy shares in Acuvue directly, this globally recognized brand is a perfect case study for understanding how a single product line can contribute to the immense value of a corporate giant. For a value investor, analyzing a brand like Acuvue is about peering into the machinery of a company's business to find its most durable, cash-generating parts. Its dominance in the eye care market isn't an accident; it's a result of decades of innovation, trust-building with both consumers and optometrists, and savvy marketing. This has created a powerful asset that, while not listed as a separate line item on the balance sheet, is a cornerstone of J&J's long-term success and a key component of its competitive advantage.

When legendary investor Warren Buffett talks about an economic moat, he's referring to a company's ability to protect its profits from competitors. A powerful brand is one of the widest moats a company can have, and Acuvue is a textbook example.

Trust is paramount when it comes to medical devices you put in your eyes. Consumers and their eye doctors are often willing to pay a premium for a brand they know and trust for its safety, comfort, and quality. This brand loyalty grants Johnson & Johnson significant pricing power. The company can implement modest price increases over time without fearing a mass exodus of customers to cheaper, lesser-known alternatives. This ability to command higher prices translates directly into healthier profit margins and a more robust, predictable stream of cash flow—music to a value investor's ears.

Once a customer finds a contact lens brand that works for them, often on the recommendation of a trusted professional, they are unlikely to switch. While the monetary cost of trying another brand is low, the perceived hassle and risk are high. Will the new brand be as comfortable? Will it cause irritation? This reluctance to change creates a “sticky” customer base and a form of switching costs. This stickiness ensures a reliable, recurring revenue stream for J&J, as millions of customers repurchase their Acuvue lenses month after month, year after year.

A smart investor never analyzes a single product in a vacuum. You must understand how it fits into the parent company's overall strategy and structure. Acuvue is a star player, but it's part of a much larger team.

Acuvue resides within Johnson & Johnson's MedTech segment, which also includes a vast portfolio of products for surgery, orthopaedics, and interventional solutions. This diversification is a key strength. A temporary slowdown in one area can be offset by growth in another, making J&J's overall earnings more stable and resilient than those of a less diversified competitor. When you invest in J&J, you're not just betting on contact lenses; you're buying into a diversified healthcare behemoth with multiple avenues for growth.

In 2023, Johnson & Johnson completed the spinoff of its consumer health division—home to iconic brands like Band-Aid, Tylenol, and Listerine—into a new, publicly traded company called Kenvue. Acuvue was not part of this spinoff; it remained with the “new” J&J, which is now more sharply focused on pharmaceuticals and medical technology. For an investor, understanding this strategic shift is crucial. It allows J&J to concentrate its resources on higher-growth, higher-margin businesses, making an investment case for the company today different from what it was just a few years ago.

Appreciating a great brand like Acuvue is just the first step. The real work of a value investor is to determine if the company behind the brand is a good investment at its current price.

The strength of Acuvue tells you that Johnson & Johnson is a high-quality business. But is it a good stock to buy? To answer that, you must dig into the financials. A value investor would meticulously analyze J&J's income statement, balance sheet, and cash flow statement. They would scrutinize key metrics to assess its financial health and valuation, such as:

• Return on Invested Capital (ROIC): Does the company generate high returns on the money it invests in its operations?
• Debt-to-Equity Ratio: Is the company's debt level manageable?
• Price-to-Earnings (P/E) Ratio: How does the stock's price compare to its annual earnings, both historically and against its peers?

The final and most crucial step is to buy with a margin of safety. A value investor first calculates a company's intrinsic value—an estimate of what the business is truly worth based on its future cash-generating potential. The strength and predictability of the Acuvue brand make estimating J&J's future cash flows a bit easier. However, an investment is only made when the market price of the stock is trading at a significant discount to this calculated intrinsic value. This discount is the margin of safety, which provides both protection against errors in judgment and the potential for attractive returns. The best brand in the world can be a terrible investment if you overpay for it.