To The Moon

$Solventum(SOLV)$, the healthcare spin-off from $3M(MMM)$, recently released its first-quarter earnings report. While the headline numbers weren't disastrous, they did little to inspire confidence, leading me to seriously consider divesting my shares.

Solventum reported flat to slightly positive sales growth, which is underwhelming considering their addressable market is estimated to be growing at 6% annually. This suggests they are failing to capture their fair share of the market. Despite this lackluster performance, Solventum boasts ambitious growth plans, including improving market share, evolving their sales model, and launching new products. However, the details surrounding these plans are scarce, making it difficult to assess their feasibility.

Solventum's capital expenditure plans are a significant concern. The company is tight-lipped about whether this high CAPEX is a one-time expense or a recurring trend. If it's the latter, it could significantly eat into their free cash flow, hindering their ability to deliver on their ambitious growth promises. Additionally, the claim that this CAPEX will drive innovation and growth despite stagnant sales figures seems overly optimistic.

Solventum's commitment to prioritizing debt repayment over shareholder rewards is understandable. However, it also means that income-seeking investors won't benefit from dividends or share repurchases for the next two years. This significantly reduces the appeal of SOLV for a particular investor segment.

Solventum's core products appear to be increasingly commoditized, reflected in their minimal organic growth. This trend could continue, further squeezing their margins. Furthermore, the long-term impact of potential litigation surrounding PFAS remains unclear. While some might view the healthcare segment as a potential growth driver, the commoditization of many of their products suggests otherwise.

The spin-off of SOLV from 3M reminds me of the separation of $Johnson & Johnson(JNJ)$ and $Kenvue Inc(KVUE)$. In both cases, the parent companies divested segments with lower growth prospects. Additionally, both JNJ and 3M face massive litigation issues, which could have a significant financial impact in the long run. Given these similarities, I'm wary of SOLV's long-term prospects.

SOLV Daily Chart

While SOLV isn't a burning dumpster fire of an investment, it fails to impress. The tepid growth, unclear path to future success, and prioritization of debt repayment over shareholder rewards make it a less than attractive proposition. The initial pop SOLV might experience after the share-service agreement expires, similar to what KVUE saw, wouldn't be enough to justify holding onto the stock.

Solventum's underwhelming debut has convinced me to divest my shares. The combination of mediocre growth, ambitious but opaque plans, and a focus on debt repayment over shareholder rewards makes SOLV a lackluster investment. There are better opportunities out there for investors seeking strong growth and a clear path to future success. I'll be putting my money elsewhere.

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Disclaimer: This is not financial advice. Please do your own research before making any investment decisions.