Held Together by Scotch Tape?

With uncertainty’s tight grip on investors, many are choosing to dump cash into blue-chip stocks. 

And why wouldn’t you?

Names like Carvana (CVNA) and Stitch Fix (SFIX) are practically penny stocks.

That’s why it wasn’t surprising to see searches for blue-chip “safety” stocks pick up as markets fell down.

Many financial pros sought refuge in well-established companies with heavy cash flow.

But our proprietary Trackstar database identified one beaten-down blue chip that has gotten more searches over the last month than Philip Morris (PM), Kraft Heinz (KHC), and Berkshire Hathaway (BRK.B). 

3M (MMM) could be a stock investors pile into given its attractive dividend and low valuation. 

But the company has been subject to a sluggish economy and copious lawsuits.

So we dug in to see whether 3M is a value play or merely held together by Scotch tape.

3M’s Business

3M is an industrial group with a history of innovation. It breaks its business into the following segments: Safety & Industrial, Health Care, Transportation & Electronics, and Consumer. 

It sells over 60,000 products for businesses and consumers. Some of the more familiar brands in its portfolio include Post-it, Scotch Tape, Scotchgard, Ace Bandages, Command, and Filtrete.

The company’s products are used in the automotive, healthcare, manufacturing, safety, transportation, energy, electronics, commercial, consumer, design, and construction industries. 

MMM makes its most revenues from its Safety & Industrial segment, followed by Health Care. 

In Q3, the firm divested its Food Safety business. In addition, it plans to spin off its Health Care business and have two publicly traded companies. 

Shares of MMM have been under pressure in 2022, mainly due to a weakness in the economy and pending lawsuits 3M is dealing with. 

One of these suits is for selling faulty earplugs to military personnel who are now experiencing hearing loss. The second is about PFAS contamination. 

This year, more than 230K lawsuits were filed against 3M. However, most are dismissed or settled out of court.

Financials

MMM modestly grew its revenues over the last six years, from $30.1 billion in 2016 to $35.3 billion in 2021. Over the last 12 months, it hit $34.7 billion in sales. 

As COVID waned, sales of disposable respirators declined in Q3 from Q2 but delivered sequential and year-over-year margin expansion.

We like 3M’s rich history of rewarding investors. 

In Q3, it returned $1 billion to shareholders through dividends and gross share repurchases. It’s paid dividends for over 100 years without interruption. 

Currently, 3M boasts a dividend yield of 4.8%. 

The company has $3.59 billion in cash and $16.63 billion in total debt. Its 1.56x current ratio is another example of its strong financial footing. 

Valuation

MMM trades at a P/E GAAP ratio of 10.9x, substantially lower than its five-year average of 20.9x. Moreover, it’s a lot cheaper than its competitors. 

For example, Honeywell (HON) has a P/E GAAP ratio of 27x, General Electric (GE) NA, Siemens AG (SIEGY) 42.6x, and Illinois Tool Works (ITW) 24.5x.

3M has a price-to-sales ratio of 2x, notably lower than its five-year average of 3.1x. While that’s better than HON at 4.1x and ITW at 4.2x, it’s not as cheap as GE at 1.2x and SIEGY at 1.3x. 

Profitability

MMM boasts a net income margin of 18.9%, which is considerably higher than some of its rivals. For example, GE has a net income margin of -7.7% and SIEGY 3.1%. Meanwhile, ITW is at 17.4% and HON at 15.3%. 

Most importantly, 3M is a moneymaking machine. 

The firm generates $5.6 billion per year in cash from operations. The only competitor that does better is SIEGY at $10.9 billion. 

However, MMM has a higher EBIT margin than SEIGY, 14.6% vs. 10.4%. But it’s not as high as ITW at 23.4% or HON at 20.9%. 

Growth

After having its best year revenue-wise in 2021, MMM experienced a slight decline in 2022. The firm’s revenue growth YoY is -1.6%. Meanwhile, SIEGY’s is 5.4%, GE’s 0.22%, ITW’s 9.75%, and HON’s 0.87%.

3M’s EBITDA growth of -31% YoY is disappointing. Especially when you look at that of other companies in its category. Notably, GE at 83.6% and SIEGY at 22.4%.

Our Opinion 8/10

A weaker economy doesn’t bode well for MMM. Nor does the uncertainty of its pending lawsuits, specifically the earplug one.

But with the stock down 30% year to date, one could argue that the bad news is priced in the stock. 

It’s trading at relatively low P/E multiples and has a rich tradition spanning more than 100 years. 

Moreover, it pays a nice dividend, yielding nearly 5%. 

We believe the stock is a buy at these levels, despite all the uncertainty it faces in the near term.