Solventum Corporation (SOLV)

By both methods, the value today (DCF $182 · Multiples $174) exceeds the market price ($85).

Today — with margin of safety: at $85 trades ~51.0% below its value discounted to today (~$174) — the wide discount we require (≥38%, equivalent to a ~15% annual return); the risk is covered by the margin, not the rate.

At 5 years — Muy infravalorado: the target price ($217) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years comfortably exceeds the risk-free rate (4.5%) — and the discount reaches the required margin of safety.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($85) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-9.8%/year) than we project (3.4%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$0.8 bn of owner earnings in year 5 (vs ~$1.7 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on EV/EBIT (suma de las partes). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Solventum separated from 3M in 2024 and is still working through that separation: reported TTM EBIT (to Jun-2026) includes the non-recurring gain of US$1,500 million from the sale of the Purification and Filtration business (closed in September 2025) and carries transitional spin-off, litigation and restructuring costs quantified in the company's own non-GAAP reconciliation (the 8-K of 5-Aug-2026). The path uses a normalized EBIT margin (~19.9% in year 0) that excludes that gain and the separation costs already identified with their own figures, but does keep the amortization of acquired intangibles as a real cost. That normalized level is consistent with the company's pre-disruption operating margin in FY2022-FY2023 (20.6-20.8%), which supports that it is not an optimistic assumption but a reversion toward the clean historical level, with a modest further improvement toward year 5 from the gradual unwinding of separation costs and the «Transform for the Future» restructuring program. Year 1 starts with a deliberate deceleration (+1.3% reported) for two declared reasons: (a) the company's 2026 guidance (8-K 5-Aug-2026) of organic growth of +2.5%/+3.0% reported (or +3.5%/+4.0% excluding SKU exits), and (b) the drag of residual Purification and Filtration revenue within the TTM (a business sold in September 2025, but with ~2 months of revenue still inside the Jul-2025/Jun-2026 TTM window) that does not repeat. The company is a sum of the parts: MedSurg + Dental Solutions (regulated medical devices, capital-intensive manufacturing) is modeled with a medical technology multiple, and Health Information Systems (clinical documentation and revenue cycle software, capital-light) with a mature software multiple — the company itself announced in the release of 5-Aug-2026 its intention to separate Health Information Systems, which reinforces that these are two businesses of different natures. The share repurchase started in the first half of 2026 (US$355 million, the first since the spin-off) is too recent to extrapolate as a sustained rate — it exceeds the full-year 2026 free cash flow guidance (US$200-300 million) — so the model accumulates cash rather than projecting continued buybacks, a declared simplification.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $217 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $85, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $217 in 5 years and a required return of 4.5% annually, the maximum to pay today is $174. Against the current market price ($85), the margin of safety is 51.0% (trades below the maximum → there is margin) and the total return at that price would be 20.5% annually.

• Low multiple on normalized EBIT. The implicit entry multiple on normalized EBIT looks below the method's medical technology band.
• Misleading reported multiple. On reported EBIT (inflated by the sale gain), the entry multiple looks artificially low -normalization is required to make a fair comparison.
• Sum of the parts with two different natures. MedSurg plus Dental Solutions and Health Information Systems are valued with separate multiples and bands, avoiding forcing a single multiple onto the consolidated entity.
• Sensitivity to separation execution. A significant part of the margin of safety depends on the Health Information Systems separation and the unwinding of separation costs going as expected.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (110%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Margins distorted by non-recurring items. The Purification and Filtration sale gain and the separation costs require normalization before reading any reported multiple.
• Normalized operating margin consistent with pre-spin history. The normalized ~19.9% at year 0 matches the 20.6%-20.8% range of FY2022-FY2023, before the spin-off disruption.
• Operating cash flow depressed by transitional items. Reported TTM OCF is well below reported net income, partly due to working capital swings tied to the separation.
• High-margin software segment. Health Information Systems operates at a ~36.5% segment operating margin, well above the rest of the portfolio.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Solventum does not report quantified per-product volumes in its public disclosures; growth is tracked at the segment revenue level, the most granular unit of measure available. The first half of 2026 shows a marked acceleration (consolidated organic growth of 9.5% in the second quarter) that the company itself attributes in part to orders pulled forward ahead of an ERP system change -a demand pull-forward effect, not necessarily a structural change in the growth pace- which is why the projection path does not extrapolate that pace forward.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Moderate, evenly spread organic growth. The three segments grew between +3.9% and +4.2% in FY2025, with no dominant driver or pronounced weakness.
• Q2-2026 acceleration not fully recurring. The +9.5% organic growth in the second quarter includes an order pull-forward ahead of an ERP system change.
• Elevated company guidance for 2026. The company raised its guidance for organic growth, adjusted earnings per share and free cash flow in the Aug-5-2026 release.
• No growth driver in 'All other'. The potable water and remaining 3M supply business contracted slightly in FY2025 and is not expected to contribute growth.

• Regulated, recurring business. Medical devices and clinical software with relatively stable demand tied to healthcare spending, non-discretionary.
• Mix of different natures. Combines capital-intensive regulated manufacturing with capital-light software, which calls for a sum-of-the-parts valuation.
• Residual dependence on 3M. Manufacturing, distribution and brand transition agreements still in effect, with defined expiration terms.
• Regulatory barriers. FDA authorizations and international equivalents raise the cost of entry for new competitors in each product category.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 2.2x
• !Interest coverage (EBIT / interest)6.6x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 110% of ROIC
• !Value creation (ROIC − 10% bar)+4pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.6x — no over-investment
• !Float / working capitalConsumes cash $0.1 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 2.0% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Elevated leverage. Total debt of ~$5,100M against equity of ~$4,800M, inherited from the 2024 spin-off financing.
• Limited cash. Cash and equivalents of $403M at the close of the second quarter of 2026, after funding buybacks and the Acera Surgical integration.
• No net deleveraging yet visible. Total debt remained essentially stable between December 2025 and June 2026 despite the $4,000M collected from the Purification and Filtration sale.
• Positive guided free cash flow. The company guides to $200-300M of free cash flow for full-year 2026, positive but still modest relative to the balance sheet's size.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO experience. Bryan Hanson previously led Zimmer Biomet as CEO and headed 3M's health care business before the spin-off.
• Modest share ownership. Directors and executives as a group own less than 1% of shares outstanding.
• Remaining shareholder in exit. 3M retains 14.7% with an obligation to divest within up to five years -latent selling pressure, not a long-term controlling anchor.
• Strategic decision to separate Health Information Systems. Recent announcement, still without a defined structure; could unlock value or generate execution uncertainty.

• Recent spin-off (2024) without consolidated analyst coverage and with a remaining shareholder (3M, 14.7%) in gradual divestment -a classic source of missing buyers.
• Reported profit and cash flow severely distorted by a non-recurring accounting gain of $1,500M and by cash separation/litigation costs, which makes surface multiples (P/E, reported EV/FCF) fail to reflect the business's normalized economics.
• Elevated leverage inherited from the spin-off financing, which generates a perception of financial risk greater than the underlying operating business suggests.

The combination of a noisy accounting history -divestiture gain, separation costs, litigation- with a still-transitioning shareholder structure (3M selling down its remainder) fits the method's 'missing buyers' pattern: there is no evidence that the operating business is broken, only that not enough buyers are yet paying close attention to a story that is hard to read at first glance. The symmetric risk -that the market is right and the separation costs turn out to be more structural than the company acknowledges- is real and is priced through the required margin of safety, not dismissed.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +12%/year (+76% total): the margin of safety protects the downside. The bull (+28%/year, +247% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Leverage. Debt inherited from the spin-off reduces financial flexibility and increases vulnerability to adverse economic conditions.
• Dependence on 3M. Transition agreements and indemnifications (including PFAS liabilities) that might not cover the full liability if 3M disputes coverage.
• Spin-off tax risk. If the separation failed to qualify as a tax-free transaction, it would generate significant tax liabilities and restricts capital allocation for two years.
• AI disruption in Health Information Systems. Risk explicitly acknowledged by the company itself against competitors with greater data scale.
• Execution of the announced separation. The structure and buyer for the Health Information Systems separation are still undefined.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: narrow moat, eroding.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 3% at a multiple/growth of 3.5 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 8% (EBIT/EV) + ROIC 14% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -10% vs our 3%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +12%/yr, bull-scenario ceiling +28%/yr over 5y and a +51% margin → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, eroding; sources: intangibles, switching costs, cost advantage, efficient scale → fails the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -10%, within what we project (3%) — the story squares with the numbers.