Solventum (SOLV)

Healthcare solutions provider Solventum (NYSE:SOLV) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 2.7% year on year to $2.07 billion. Its non-GAAP profit of $1.34 per share was 9.7% above analysts’ consensus estimates.

Company Overview

Founded in 1985, Solventum (NYSE:SOLV) develops, manufactures, and commercializes a portfolio of healthcare products and services addressing critical customer and therapeutic patient needs.

The surgical equipment and consumables industry provides tools, devices, and disposable products essential for surgeries and medical procedures. These companies therefore benefit from relatively consistent demand, driven by the ongoing need for medical interventions, recurring revenue from consumables, and long-term contracts with hospitals and healthcare providers. However, the high costs of R&D and regulatory compliance, coupled with intense competition and pricing pressures from cost-conscious customers, can constrain profitability. Over the next few years, tailwinds include aging populations, which tend to need surgical interventions at higher rates. The increasing integration of AI and robotics into surgical procedures could also create opportunities for differentiation and innovation. However, the industry faces headwinds including potential supply chain vulnerabilities, evolving regulatory requirements, and more widespread efforts to make healthcare less costly.

Healthcare industry competitors include Baxter International (NYSE:BAX), Becton Dickinson (NYSE:BDX), Edwards Lifesciences (NYSE:EW), and Medtronic (NYSE:MDT).

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $8.31 billion in revenue over the past 12 months, Solventum has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Solventum’s 1.2% annualized revenue growth over the last two years was tepid. This fell short of our benchmarks and is a tough starting point for our analysis.

We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Solventum’s organic revenue averaged 1.6% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Solventum reported modest year-on-year revenue growth of 2.7% but beat Wall Street’s estimates by 2.7%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a slight deceleration versus the last two years. This projection is underwhelming and indicates its products and services will face some demand challenges.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Solventum’s operating margin has shrunk over the last 12 months, but it still averaged 17.2% over the last three years, solid for a healthcare business. This shows it generally manages its expenses well.

This quarter, Solventum generated an operating profit margin of 7.3%, down 11.6 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Solventum, its EPS declined by 21.9% annually over the last two years while its revenue grew by 1.2%. This tells us the company became less profitable on a per-share basis as it expanded.

In Q1, Solventum reported EPS at $1.34, down from $2.08 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 9.7%. Over the next 12 months, Wall Street expects Solventum’s full-year EPS of $5.95 to shrink by 5%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Solventum has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 18.8% over the last three years, quite impressive for a healthcare business.

Solventum burned through $80 million of cash in Q1, equivalent to a negative 3.9% margin. The company’s cash flow turned negative after being positive in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Solventum reported $534 million of cash and $7.91 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.80 billion of EBITDA over the last 12 months, we view Solventum’s 4.1× net-debt-to-EBITDA ratio as safe. We also see its $224 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Solventum beat analysts’ organic revenue and EPS expectations this quarter. On the other hand, its EBITDA missed. Overall, we think this was a solid quarter with some key areas of upside. The stock remained flat at $66.63 immediately after reporting.

Updated: May 22, 2025 at 11:48 PM EDT

Are you wondering whether to buy Solventum or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Solventum isn’t a terrible business, but it doesn’t pass our bar. To kick things off, its revenue growth was uninspiring over the last two years, and analysts don’t see anything changing over the next 12 months. And while its strong operating margins show it’s a well-run business, the downside is its declining EPS over the last two years makes it a less attractive asset to the public markets. On top of that, its declining adjusted operating margin shows the business has become less efficient.

Solventum’s P/E ratio based on the next 12 months is 12.8x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $81.27 on the company (compared to the current share price of $72.66).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.