The recent trend of corporate separations has returned, with two major spinoffs entering the S&P 500 Index this week. However, only one has managed to capture the interest of investors.
GE Vernova Inc., the clean energy division spun off from General Electric, has seen its value increase by approximately 19% since it began trading, significantly outperforming the S&P 500's steady performance. On the other hand, Solventum Corp., a healthcare entity spun off from 3M Co., has experienced a nearly 30% decline in its stock value from the commencement of when-issued trading, according to Bloomberg data.
The contrasting initial trading performances of these spinoffs highlight the uncertain nature of dividing large corporations into separate entities.
GE Vernova's debut was met with enthusiasm, as investors eagerly invested in General Electric prior to the spinoff's completion. GE Aerospace, now trading independently under the ticker GE, has seen a 4% increase this week, contributing to an 88% rise over the past year and reaching a seven-year peak.
Conversely, while the 3M split into Solventum generated some initial optimism, concerns about the unit’s substantial debt have overshadowed potential gains. The parent company, in contrast, has enjoyed a 7.1% increase since March 26.
Jim Osman, founder of The Edge Consulting Group, advises investors to hold off on purchasing shares in either company for the time being.
According to Osman, GE Vernova is currently fairly valued, suggesting that a more opportune moment for investment may arise in the future. He urges caution with Solventum, pointing out its high leverage compared to its peers. The company is saddled with approximately $8 billion in debt and anticipates organic revenue growth to be between minus 2% and zero for 2024.
Analysts from Bloomberg Intelligence predict challenging times ahead for Solventum, expecting a 2% decline in revenue this year due to a stock-keeping unit reorganization, a forecast significantly below its prior market growth expectations.
The considerable market capitalizations of GE Vernova and Solventum, estimated at $37 billion and $11 billion respectively, justify their inclusion in the S&P 500, a move that typically attracts investor interest. However, analyst opinions on the stocks remain mixed.
JPMorgan Chase & Co. suggests waiting for a dip in GE Vernova's shares before buying, as its current trading price is close to the firm's year-end target. RBC Capital Markets holds a more optimistic view, highlighting the company's potential for pursuing high-growth strategies as an independent entity. Meanwhile, Spin-Off Research has initiated coverage of the energy unit with a hold rating and a $145 price target.
Solventum has received a buy rating from Spin-Off Research, while Edward Jones has given it a hold rating. Currently, no major banks have begun covering the healthcare stock, according to Bloomberg data.
