(Bloomberg) — Corporate breakups have come back into fashion, but only one of the two blue-chip spinoff companies that joined the S&P 500 index this week has found favor with investors.
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GE Vernova Inc., General Electric’s clean energy subsidiary, has climbed about 19% since early trading, eclipsing the index’s stagnant performance. Solventum Corp., a healthcare company spun off from 3M Co., traded in the other direction, with the stock falling nearly 30% since trading began last week, according to Bloomberg data.
Although early spin-off negotiations may be volatile, the divergence casts some doubt on the rationale for separating large companies into their constituent parts.
For GE Vernova, this transaction was highly anticipated and closely watched as investors flocked to General Electric before the transaction was finalized. GE Aerospace, the standalone company under the GE ticker, soared 4% this week, adding to an 88% rise over the past year, as the stock closed at its highest level in seven years .
On the other hand, although 3M’s separation of Solventum fueled some optimism on Wall Street, analysts cited the unit’s heavy debt load as a concern. Whatever gains were anticipated went to the parent company, which is up 7.1% since the March 26 open.
Jim Osman, founder of special situations research firm The Edge Consulting Group, recommends clients wait before buying either company.
GE Vernova is “fairly valued, which suggests that the timing for action may be more favorable in the long term,” Osman said.
“Caution is required,” he said of Solventum, given that its leverage is higher than that of its peers. The company has about $8 billion in debt and is targeting organic revenue growth of between minus 2% and zero in 2024.
What Bloomberg Intelligence says:
The split of Solventum and 3M faces considerable hurdles over the next two years, with a reorganization of the inventory management unit likely to result in a 2% revenue decline this year, well below the previous market expansion.
— Matt Henriksson, Andrew Silverman and Larson Cole, analysts
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Both companies are large enough to merit joining the S&P 500, which would typically attract cash flows from investors who track the benchmark. GE Vernova’s market capitalization was about $37 billion as of Wednesday’s close, while Solventum’s was $11 billion.
Both stocks drew mixed reactions from analysts who were slow to cover them.
For GE Vernova, JPMorgan Chase & Co. advised clients to wait for a decline in stocks to buy given that they are trading near the company’s year-end price target of $141. RBC Capital Markets was optimistic, however, touting greater flexibility as a standalone company to pursue high-growth strategies. Spin-Off Research initiated coverage on the energy unit with a hold recommendation and a price target of $145.
The company rated Solventum a buy, while Edward Jones rated it a hold, according to data compiled by Bloomberg. No major banks have launched healthcare sector coverage, the data shows.
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