Healthcare business Solventum (NYSE:SOLV) — which covers information technology, wound care and other specialties — slipped on its public market debut. SOLV stock represents a spinoff from industrial conglomerate and applied sciences giant 3M (NYSE:MMM). While some might view Solventum as a cynical means to extract value from a beleaguered organization, others could be attracted by its discounted valuation.
On the not-so-positive front, it’s difficult to ignore that 3M suffered a financial and reputational hit. In particular, the company settled a $6 billion lawsuit related to the sale of defective earplugs. As well, it had to deal with a $10.3 billion lawsuit tied to damage caused to U.S. drinking water supplies. Perhaps not surprisingly, MMM stock incurred a roughly 57% loss over the past five years.
Given the circumstances, it’s tempting to view SOLV stock as a means to get something back from 3M. Adding to this sentiment, the industrial giant isn’t on track for robust growth. Analysts anticipate the current fiscal year revenue to reach an average of $31.87 billion. That’s up only 1.5% against last year’s sales of $31.39 billion.
Valuation Could Save SOLV Stock
With the broader context, it’s difficult to fault 3M shareholders for wanting to extract value now out of SOLV stock. After all, spinoffs don’t always perform well following their debut, with consumer healthcare products specialist Kenvue (NYSE:KVUE) providing a recent example.
Nevertheless, as Barron’s pointed out, SOLV stock also appears compelling based on relative value. At one point, shares were trading at a 16% discount from the initial price of $80. The publication argues that at this level, SOLV is trading for less than 11x projected 2024 earnings. Management anticipates earnings per share to land between $6.10 to $6.40 this year.
Notably, the S&P 500 index trades above 20x estimated 2024 earnings. Further, comparable healthcare companies like Becton Dickinson (NYSE:BDX) also trade at lofty multiples, 19x in BDX’s case.
To be fair, the discount isn’t a shocking development as SOLV stock represents a new entity. Further, the underlying company lacks operating profit growth. However, the enterprise has its strengths, which includes operating profit margins above 20%.
Why It Matters
As a fresh face, analysts have not issued coverage on SOLV stock. However, 3M is a consensus hold, breaking down as one buy, seven holds and one sell. It’s notable, though, that the average price target stands at $112.56, implying nearly 21% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
