Industry giants 3M and General Electric are spinning off and listing units independently.
Solventum (SOLV), the healthcare spinoff from 3M, began trading last Wednesday. Initially issued at $80, its share price has fallen 14% to $69.55 in just three days.
Solventum markets a diverse range of healthcare products, organized into four business segments. MedSurg offers a variety of products from advanced wound care to stethoscopes. The dental solutions segment provides aligners, composites, cements, and more. Health Information Systems delivers software solutions for clinics and hospitals, facilitating documentation and claims processing. Purification & Filtration, true to its name, produces filters and membranes for pharmaceuticals and beyond, including food and beverage applications.
Chances are, you have seen or even used some of their wound plasters or masks. These products are now under Solventum.
As a mature company, Solventum experiences modest growth rates, remaining within single-digit percentages. This scenario mirrors the classic fable of the tortoise versus the hare, demonstrating that a slow and steady pace can, at times, lead to a win. The key strategy lies in buying such stocks only when they are undervalued and offer a significant margin of safety and selling them once the stock price rebounds. Currently, Solventum finds itself in this very position.
Solventum is trading at a P/E of 8.7x. This valuation is relatively low for a company that generates steady earnings and cash flow, particularly in the healthcare industry where investors are typically willing to pay more, often exceeding a P/E of 20x. Despite the underperformance of 3M shares, they have an average 5-year P/E of 12.8x. If Solventum were to trade at a P/E of 12.8x, it would imply a 47% potential gain.
Therefore, I believe Solventum is undervalued and the initial sell-off may be attributed to 3M shareholders divesting their stakes. As new shareholders with stronger holding power come in, the stock could begin to rebound.
On April 2, General Electric (GE) will spin off its clean energy business as GE Vernova (GEV).
The company supply equipment for various forms of renewable energy generation, from wind to nuclear.
The spinoff makes sense as it could attract investors focused on climate change or institutional investors mandated to invest solely in green energy. Meanwhile, GE will concentrate on aerospace engines.
Although renewable energy is considered a growth sector, GE Vernova’s revenue growth forecasts are modest: about 5% for FY24 and another mid-single-digit growth for FY25, likely due to its substantial revenue base of over $30 billion.
GE Vernova has transitioned from a cash-burning enterprise to one generating increasing free cash flow—a important achievement, given the high capital expenditures and long wait times traditionally associated with energy generation equipment. As the installed base grows, cash flow becomes more stable, driven by rising maintenance revenues that incur lower fixed costs and yield better, more predictable margins.
I anticipate GE Vernova may trade lower post-listing, as some GE shareholders may choose to sell their newly acquired Vernova shares, leading to selling pressure similar to Solventum’s experience. It may be prudent to reassess if the share price reaches a sufficiently attractive margin of safety.
Both spinoff stocks will also be added to the S&P 500 index this week, replacing V.F. Corp (VFC) and Dentsply Sirona (XRAY). This inclusion is likely to attract passive investment funds, potentially increasing demand for the stocks.
