Key insights
- The post analyzes Solventum (SOLV), a recent spin-off from 3M, focusing on its FY2026 financial guidance and long-term objectives. It estimates a potential free cash flow of $4.79 per share after accounting for separation and restructuring costs. A discounted cash flow valuation suggests upside, contingent on management's ability to execute its turnaround strategy. This could positively influence investor sentiment towards SOLV and potentially other spin-off companies.
Solventum spun off from 3M. The books are very messy. The good news is that they have a great turnaround leader Bryan Hanson, who was hired by 3m specificially for the spin-off (he previously turned Zimmer Biomet around). I bought a small dollop to keep track of it, after he sold off the filtration business to pare down debt. And now i am doing more DD to see if i should buy more.
- Solventum published this during their latest earnings release
FY2026 financial guidance and considerations¹
|Metric|Guidance / Considerations| |:-|:-| |Organic sales growth|+2.0% to +3.0% +3.0% to +4.0% excluding ~100bps SKU-exit impact| |Adjusted EPS|$6.40 to $6.60 Estimating toward high-end of the range| |Free cash flow|~$200M|
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The 200m FCF works out to be around $1.15 per share.
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using Q1 as an indication for the rest of the year, i estimate separation costs to be 0.73 x 4 = 2.92, i also include Q1 restructuring costs of 0.18 x 4= 0.72.
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This means that at the end of this year, if there were no separation costs (with 3M), and no more restructuring costs ( sale of the filtration business to Thermo Fisher), the FCF would be at east 1.15 + 0.72 + 2.92 = $4.79
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Management short term and long term objectives:
|Metric|Short-Term (FY 2026 Guidance)|Long-Term (2025–2028 Target)| |:-|:-|:-| || |Organic Sales Growth|+2.0% to +3.0%|+4.0% to +5.0%| |Adjusted EPS|$6.40$ to $6.60|~10% CAGR| |Operating Margin|-|23% to 25% (by 2028)| |Free Cash Flow|$200$ million|80% FCF Conversion|
- Using a discount rate of 9% (their actual WACC is closer to 7.4%), and a 5% growth instead of 10%, as a form of MOS. I will assume their the 5% growth is for 5 years instead of 10 before the company descends into a long term growth of 3%.
This works out to 4.79 x a multiplier of 18.71 = 89.65 value for end of this year 2026. To bring it to the beginning of the year 2026, the value is 89.65 / 1.09 = $82.2
So, the considering the stock is 73, now, the company is only slightly undervalued
- Morningstar and CFRA have fair values of Solventum at $71.00 and $111.72 respectively.