Solventum Corporation (NYSE:SOLV): Is the Spin-Off a Blessing in Disguise?
We came across a bullish thesis on Solventum Corporation (NYSE:SOLV) on ValueInvestorsClub by GCA. In this article, we will summarize the bulls' thesis on SOLV. The company's shares were trading at $74.24 when this thesis was published, vs. the closing price of $66.19 on Apr 11.
A medical technician holding the instruments in her hands
SOLV is a healthcare company that develops, manufactures, and commercializes a portfolio of solutions to address critical customer and patient needs in the United States and internationally. The company has four operating segments namely Medsurg, Dental Solutions, Health Information Systems, and Purification & Filtration. Medical/Surgical (Medsurg) accounts for more than 50% of the revenue and offers products related to speed healing and medical technologies. The remaining 45% of the revenue is almost equally distributed among the other three segments.
SOLV has been operating for more than 70 years and commands a leadership position across most of its brands. Prior to its spin-off, SOLV generated FCF worth $1.4 billion. This is expected to reduce marginally to $1.1 billion with higher working capital and CAPEX requirements.
However, the potential to improve cannot be ruled out as SOLV had earlier not been held back by the management at 3M. SOLV was subject to unfavorable service agreements with 3M and burdened with high debt levels. The potential for growth was limited due to low capital allocation. The spin-off is set to provide a more favorable outlook for SOLV's business and better management of its capital. There is also a possibility of a 2% margin expansion with better R&D spending and commercialization of its products as a standalone company. The CEO and CFO have earlier achieved similar operational efficiency with another spin-off, Covidien, and so the idea of a better financial performance does not seem too far-fetched.
With a 2% projected revenue growth and an expansion in margin from 22% to 24%, SOLV should achieve an EBIT of $2.1 billion by 2027. Accounting for a multiple of 14x based on comparable companies, a fair value of the stock price in 2027 would be $146, offering a 120% upside.
While we acknowledge the potential of SOLV as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SOLV but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.
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