The Uranium Tourist Guide Part V: Solstice Advanced Materials $SOLS

In 2024, I had a four part series on Uranium. My big takeaway was that the CEO of Energy Fuels (UUUU) probably graduated at the bottom quintile of his class, but that the company was otherwise solid. The CEO of Uranium Energy Corp (UEC) might not be a grifter, but he gives off some signals that are mixed at best. He’ll be a great stock promoter, but overlooking red flags is not a game I’m keen to play. ASP Isotopes (ASPI) does create a threat to traditional centrifuge enrichment, but they are a decade away from being a concern to the nuclear buildout. I take to heart what Elon Musk said regarding manufacturing at scale being a hundred times more difficult than inventing a prototype.

And then there was my personal favorite choice of the whole Uranium complex, Centrus Energy (LEU). When I wrote about them on July 25th 2024, they had a stock price that opened at $42.61. Their share price closed on Friday at $363.71, but traded intraday as high as $423, and is likely to rebound at least to $380 on Monday if the futures market is any indication. On a side note, I recommend preparing to trim 50% of your LEU position. You could sell half when the technicals indicate, or you could sell a covered call. You can take $102 a share off the table with a covered call that expires on December 18th of 2026, and has a strike price of $520. If it gets triggered, you would be selling at $622 a share, and if it doesn’t get triggered, the call premium is twice what you paid for the shares if you bought them on July 25th. If you punt out to December 2027, you can take $135 for promising to sell at $560, resulting in a final sale price of $695, about an 80% return in two years from here if it gets called away. Some people even hedge their psychological bets by taking their call premium and buying 30 more shares for every 100. That way, if the shares do get called away, you still have some left that were psychologically free, except for taxes of course. These are happy problems to have, and you should have fun with taking profits.

There are several reasons why I would trim LEU here. They do have serious competition, BWXT, the nuclear spinoff from Babcock & Wilcox (BW), is entering the enrichment market. They have deep pockets from being a stable and lucrative defense contractor for decades. LEU is going to have to raise billions of dollars of equity capital to build out their centrifuges, at some point the market might get frustrated with the dilution. The nuclear buildout is going to take a decade or two, and at some point in the next few years the narrative will probably get challenged, and the stock price will likely crash. The reason why I am not saying to sell all of your LEU, is because the stock could easily double from here before that happens, although a price to earnings ratio of 60 is pretty rich for a capital intensive industry. Palantir might fetch a higher multiple, but LEU is already in nosebleed territory.

The reason for today’s article is that, in the third installment of the Uranium Tourist Guide, I detailed the steps between mining, conversion, and enrichment. In July of 2024, there was no way to get exposure to uranium conversion, the only private US uranium conversion facility was mothballed, and it was managed by a partnership called ConverDyn that was 50% owned by General Atomics (Private), and 50% owned by Honeywell (HON). Since that time, the mothballed conversion facility has been restarted, and Honeywell announced it was splitting itself into three pieces, with the 50% ownership of ConverDyn going to Solstice Advanced Materials (SOLS). Honeywell shareholders of record this upcoming Friday October 17th will be receiving some SOLS shares in their portfolio on October 31st. Also since last July, Honeywell has traded down from $140 billion market capitalization to $127 billion.

My first thought on strategy was to wait until after the spinoff and buy the shares after they inevitably crashed, because the market hates materials. Solstice Advanced Materials will be primarily a chemicals company, with two thirds of sales coming from advanced refrigerants. The closest competitor would be Chemours, trading at a forward price to earnings of 7.2. With Honeywell at a forward price to earnings of 17, that would give the share price of SOLS room to be more than cut in half from where market makers originally set their price.

But in the last few months, the market has started to love materials, and one third of SOLS revenue would come from electronics components, which is hot right now. And so there might be an arbitrage opportunity to buy HON, keep SOLS, and sell the HON afterward for a profit. Not great odds of an arbitrage opportunity due to the chemicals exposure, but still a chance.

The market seems excited about spinoffs these days due to the success of the GE Healthcare and GE Vernova spinoffs. Returns from the GEHC spinoff were 30.3% after 1 week, 34.1% after 1 month, 46.9% after three months, and 69.2% after six months. Returns from the GEV spinoff were -10.7% after 1 week, -5.8% after 1 month, 4.2% after 3 months, and 94.2% after six months. It took a moment before GE Vernova was identified as a data center buildout beneficiary with their natural gas turbines.

It’s possible at spinoff that the SOLS stock price crashes and burns like I had originally anticipated, or it’s also possible in this frothy market, that it catches a bid. And the spinoff arbitrage might be fun as Honeywell separates automation and aerospace. Automation is another major secular trend with reshoring, immigration enforcement, and baby boomers retiring. The aerospace segment has exposure to both drones and the military industrial complex, both of which fetch large multiples. The final aerospace spinoff is scheduled for sometime in mid to late 2026, so if you buy HON now for the materials spinoff, and hold it until the middle of 2027, give or take, if the market stays frothy, and the GE spinoffs are any indication, it could double your money or better. Or not, it all depends on if the market gets excited about the pure components over the conglomerate.

As far as large cap stocks go, Honeywell isn’t cheap, but it isn’t particularly expensive at a forward price to earnings of 17, but similar competitors in automation trade at a forward price to earnings of 24. Within aerospace, the forward price to earnings ratios are even higher, coming in around 30. I had anticipated materials to be Honeywell’s least valuable earnings, and the most likely of the three to be considered the badco in the goodco / badco archetype. But now Centrus Energy trades at a price to earnings ratio of 60, although to be fair, only 12% of Solstice revenue will be attributed to their ConverDyn stake. Also, the market is mostly ignoring the ConverDyn story, all the community wants to talk about is the Aerospace spinoff.

If the Chemicals exposure in SOLS doesn’t drag it down, the capital allocation might hurt it as well. Honeywell management has indicated that SOLS will go on an acquisition spree. Under the Honeywell umbrella, the materials segment was somewhat neglected, but as its own entity, management will give materials acquisitions their full attention. It doesn’t seem to matter how accretive an acquisition is these days, the market seems to react poorly initially, and share prices only recover if synergies materialize and earnings are proven. So the smart thing to do would probably be to watchlist SOLS and stalk them for a couple of years. But then again, the smart thing isn’t always the right thing in a frothy market. And, the acquisitions are allegedly to help SOLS target the data center buildout.

So without further ado, some background information on Solstice Advanced Materials. Most of their business is refrigerants that don’t destroy the ozone layer, but another third of sales is thermal gels that dissipate heat from computer chips. Hey, wait a minute, don’t data centers run awfully hot? Solstice will have to compete with Dow, Laird, and 3M, but they do have a shot at taking market share of data center cooling applications over the next few years, especially with a focused management team instead of being the redheaded stepchild of Honeywell. With the aggressive growth of the data center buildout, there is a chance that SOLS fetches outrageous data center supplier multiples, or at least enjoys 10% to 15% annual sales growth instead of recent 4.4% annual growth.

Again, Chemours would be the closest comparable company in the refrigerant space, and they are trading at a price to sales ratio of 0.38x. If SOLS trades like Chemours, it would be a $1.2 billion market cap company. But, the $446 million of revenue from uranium conversion would make it comparable to Centrus Energy, who has $436 million of revenue in the last twelve months and trades at a price to sales of over 15x. SOLS has a $2 billion backlog of conversion business, and LEU has a $4 billion backlog of enrichment business, but the two aren’t so far apart. If anything, SOLS is much farther ahead as LEU still has to build their enrichment capacity, meanwhile, SOLS already has their conversion capacity completed. And while SOLS only owns 50% of ConverDyn, they own 100% of the uranium conversion facility itself; the ConverDyn partnership with Global Atomics is the marketing arm.

I could delve into the details about how SOLS only has 1.5x net debt, or how they make insulation for homebuilders and the propellant for asthma inhalers. But most of that doesn’t matter. Are they going to trade like a $3.8 billion revenue chemicals company at a $1.2 billion market capitalization, or are they going to trade like a $446 million revenue nuclear company at a $6 to $10 billion market capitalization? I have no idea, and neither does anybody else.

Buying $127 billion market cap Honeywell for the $3.8 billion revenue Solstice Advanced Materials spinoff is a gamble on spinoff arbitrage. My best guess is that the initial direction for SOLS shares is down. But I could easily be wrong. I do think that the aerospace and automation spinoff will unlock value and generate a positive spinoff arbitrage, and automation and aerospace are both hot themes that are only slightly less hot than nuclear right now. If any of my subscribers wanted to trim LEU and buy a little HON before Friday, I would understand. The smarter thing might be to buy SOLS after October 31st, the best case scenario would be that SOLS is a falling knife, and investors who want that uranium conversion exposure can keep on cost averaging down until the market finally discovers it.

With large caps, however, the odds that I can figure things out before the crowd aren’t great. If the herd understands that SOLS is a nuclear buildout beneficiary, then on October 31st, the SOLS share price direction will be straight up, and the only investors who catch that initial rally will be the Honeywell holders. Do you feel lucky?