Business Strategy – Fountainheadinvesting

Solventum (SOLV) $67

The valuation is reasonable, the price to sales ratio is just 1.5x with a $12Bn Market Cap and $8.2Bn in sales.

Solid profit-making company with 25% operating margins and an EPS of $6.25, which gives it a decent multiple of 67/6.25 or just 11 – this is a discount to comparable health companies for sure.

The big problem is the lack of revenue growth, Solventum has been struggling at $8.2MBn in sales for the last three years, and even post spin-off is guiding to zero growth. That is also a bit difficult to swallow with all their segments – MedSurg, dental, health information and drinking water filtration, having 4-6% annual growth opportunities. There seems to be an execution problem.

Pre-spin off this was a well-entrenched 70 year business within 100,000 global customers, with presence in 75% of US hospitals and 50% international sales

3M has saddled it with $7.7Bn of debt so there is an interest burden of $400Mn which will dent profitability, till they reduce it in the next two three years.

The low valuation is definitely interesting, but we don’t want to walk into a value trap, where the stock just stagnates because of zero growth. Right now, there needs to be better execution or at least a strategic plan to start growing again.

It might make sense to buy a small quantity to take advantage of the low valuation and then add more with better growth visibility.

Vestis Corp (VSTS) Buy $20

3-5 Years, Target $40 to $45. Annual Gain – 18 to 20%

GARP (Growth at A Reasonable Price)

Vestis (NYSE: VSTS) is a uniform and workplace supplies provider that’s just been carved out of Aramark (ARMK). A competitor to the very successful Cintas (CTAS), now just likely to start hitting the gas. Cintas, priced around $50 on December 13th, 2013, closed at $600 at year-end, 2023 – a twelve-bagger in 10 years! That’s an annual growth of more than 28%! I believe Vestis can emulate Cintas’ story.

These are the main reasons to buy Vestis:

1. Sustainable long-term revenues and income from long-term contracts with 93% of clients renewing each year.

2. Scale – It is the second largest provider in the rental uniforms and industrial supplies market after the $6.9Bn Cintas. Scale matters, making it a barrier to entry for smaller players unable to serve multiple locations. Operational efficiency is the reason for Cintas’ dominance – smaller players can’t do it at the same price as Cintas and Vestis, and it is far more expensive for industrial customers, local government authorities, franchises, hospitals, and restaurants to do it by themselves.

3. Fragmented market – the opportunity is tremendous, the big three players control only 25%, and it being the second largest player there is plenty of room to increase market share.

4. Cross Selling – increasing revenue per customer. Management believes that only 30-40% of Vestis’ product line is being sold and there is ample room for improvement, especially for workspace supplies.

5. Leverage Delivery agents to increase sales – continue leveraging the front line by making salespeople of its delivery agents. Currently, Vestis’ delivery agents sell on 96% of routes. These are valuable assets and will be leveraged more.

Even if Vestis emulates most of Cintas’ story we have a solid winner on our hands.