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**Born with a ball and chain**
How Solventum became a company is integral to the thesis. In 2024, 3M decided to spin off its healthcare division into a separate company, Solventum. Why would 3M give up part of its business if it's profitable? Well, 3M borrowed $8.3B and then gave that liability to Solventum, so you can think it as someone bought Solventum for that much.
**What do they do?**
Solventum's business can be broken up into 3 segments
Medical Surgical (MedSurg). This is their largest division. Their flagship product is the V.A.C. therapy system, a device that uses controlled suction to accelerate healing in serious wounds like surgical incisions, diabetic foot ulcers, and trauma wounds. Solventum essentially dominates this market. They also make other hospital products like infection prevention, sterilization equipment, and surgical supplies.
Dental solutions. They make fillings, orthodontic products etc. Examples include brands like Filtek and Clinpro. This business is relatively stable, growing slowly, and generates predictable cash flow.
Health Information Systems. This is where the growth is. They make software for hospitals that manages complex process of medical billing. For example, when a patient has surgery, dozens of diagnosis codes, procedure codes, and insurance rules must be correctly applied before the hospital gets paid. Getting this wrong means either leaving money on the table or possibly triggering an audit. Their flagship product, the 360 Encompass Autonomous Coding System, uses AI to read a patient's chart to generate the codes
**The Turnaround**
While Solventum is a good business, the $8B in debt was a huge drag on the company. They had to pay very high interest rates, poor credit ratings that deter institutions to invest, and they have worse cashflow that could have been applying to growth.
Probably the most important event in the company's history is when they sold its Purification and Filtration division to Thermo Fisher for about $4b. Solventum used that to pay down their most high-interest debt. As a result, their credit rating went from junk adjacent to BBB. They save $180M in interest costs a year. They can now use the cash saved to make acquisitions.
**Share buybacks and the mirage in financials**
In Nov 2025, Solventum authorized a $1b buyback program. At a glance, that makes no sense because the company guided only $200M in FCF for 2026. However, if you dive deeper, their FCF got crushed by one-time, non-recurring costs.
· $450-500 million in separation and restructuring charges: the cost of physically and legally detaching Solventum from 3M's systems, real estate, and supply chains, etc.
· About $100M to keep as a cash buffer
· $400-450 million in building manufacturing
· Fees paid to 3M to use their IT systems and logistics until Solventum builds its own.
If you take away these one-time expenses, Solventum actually makes about 1B in cash flow. They project that they can get there by 2027. So now the share buyback looks less irresponsible and more along the lines of management thinking their stock is undervalued.
**The Acera Acquisition**
Acera makes synthetic tissue via a modern process called electrospinning. The fibers mimics human tissue so well, the body doesn't know the difference. So they will start building new blood vessels and tissue. This acquisition is very compatible with Solventum since they already are in the wound care field. They already have deep relations with surgeons and hospitals that use Solventum's wound vac devices.
**Growth in AI Billing – 360 Encompass**
Hospital billing is extremely complex. Hospitals hire human medical coders to assign appropriate codes, but there's a shortage of them and they have high salaries. Hospitals have an incentive to automate billing and once their charting system (eg. Epic, Meditech) in Solventum's 360 Encompass system, the switching costs are extremely high. Their moat is that their system is fully transparent, making it easy for Medicare auditors to double-check if the billing is accurate.
The software was validated when Solventum got a huge partnership in May 2025 with Ensemble Health Partners which manages around $40B in patient revenue. Solventum still needs to finish training their AI models and integrate into hospital systems, but once that's done, the cost to scale is extremely low.
**Ok if the stock is this good, why is it in the dumps? – Forced Selling**
Remember, the company didn't IPO, it was spun off. If you owned 3M shares, Solventum shares just magically appeared in your brokerage. But it's not like you wanted or asked for them. Think who the F buys 3M stocks anyways? They make boring products like sandpaper, safety equipment, etc. WSB would be nowhere with this stock. It's mostly held in industrial funds/ETFs and dividend funds. But that's not what Solventum is. It's a healthcare company that pays no dividends. So these investors/funds sold off Solventum, not because it's a bad company, but just because it didn't fit their investment profile. If this sounds familiar to you, you might be thinking of a phenomenon called "index churn" where spinoffs do worst in the first year/year-half because of this mechanistic selling.
Also, 3M still holds about 20% of the company but they will need to liquidate that position by 2029, so perhaps investors are cautious. The good news is that Solventum has their repurchase program so it should act as a buffer for the 3M sales. We're probably going to see the opposite occur where industrial/dividend investors are done selling and healthcare funds will most likely continue to purchase Solventum shares.
**Risks/Headwinds**
Tariffs continue to be a problem. They're projected to lose around 100-120M in 2026, so here's hoping tariffs continue to get struck down
Rebranding. Solventum has until 2027 to remove every single 3M logo from their products, packages and regulatory filings. If they can't sell it all by then, they'll have to destroy what's leftover. Also, they would need to submit for formal regulatory re-approvals in multiple countries
The scariest risk for me is ERP migration (enterprise resource planning) ERPs coordinate everything from procurement to manufacturing to invoicing. If there are any major issues from migrating IT systems away from 3M, everything will be frozen aka supply chain disruptions which can lead to customers finding other companies to buy from. Look at TNC. Their recent drop was because they had ERP issues.
**The play**
If you want a relatively safe and undervalued investment, this is it. It's trading at a 7-8 PE while its competitor, Zimmer Biomet is trading at 25-26 PE. If you want to play it even safer, you can wait until the ERP transition looks like it's going smooth, but the stock could appreciate as that goes on. This wont be a multibagger but the risk/reward profile is favorable imo.
My position: 6 Oct $55 calls – i.e. 600 shares