Is 3M (MMM) Finally a Buy?

Financial pros are always looking for bargains.

Yet, they’ve only recently decided that 3M Company (MMM) was worth a second look.

Once hailed for its culture of innovation, 3M has seen shares in a perpetual downtrend since 2018.

At its lowest point in 2023, the stock had fallen 67%.

However, shares are up nearly 40% YTD and 21% over the past month.

Have things finally turned around, or is this just another fakeout?

3M’s Business

3M revolutionized the adhesive industry with its iconic Post-it Notes and Scotch Tape. 

These are just two of the more than 60,000 products across diverse industries, such as office supplies, healthcare, automotive, and electronics, which have resulted in over 100,000 patents.

Operating in more than 70 countries, 3M leverages its scientific expertise to create solutions for everyday challenges. 

The company’s product portfolio ranges from respirators and bandages to touchscreen displays and automotive films. 

3M segments its business into the following areas:

• Safety and Industrial (49% of total revenues) – Includes personal safety equipment, industrial adhesives, and abrasives
• Transportation and Electronics (34% of total revenues) – Encompasses automotive products, electronic components, and commercial graphics
• Consumer (17% of total revenues) – Features office supplies, home improvement products, and consumer health care items

Despite its innovative heritage, 3M has faced significant challenges over the past decade. 

The company has struggled with sluggish organic growth, falling from over 1,000 new product introductions annually to fewer than 150 in 2024.

This decline, coupled with mounting legal liabilities related to PFAS chemicals and combat earplugs, has weighed heavily on 3M’s financial performance and stock price.

3M’s CEO, William Brown, emphasized three key priorities moving forward: driving sustained organic revenue growth, increasing operational performance, and effectively deploying capital. 

In its recent Q2 2024 earnings report, 3M delivered strong results, with adjusted earnings per share of $1.93, up 39% year over year. 

The company’s focus on operational execution and productivity improvements contributed to an adjusted operating margin of 21.6%, an increase of 4.4 percentage points from the previous year.

While this marked a huge improvement for the company, its turnaround plan has much further to go.

Financials

Source: Stock Analysis

3M’s sales are essentially the same as they were in 2018. However, gross profits are down 9.4%, operating income dropped 28.6%, and net income plunged 82.3%.

The legal settlements weighed heavily on these last two years, costing the company $16.4 billion, hitting the income sheet after operating profits are calculated.

Free cash flow doesn’t yet show the impact, as the bulk of the settlement will be paid out over 13 years.

Thankfully, the company carries just $13.8 billion in debt with $10.3 billion in cash on its balance sheet.

Operating cash flow runs $5.7 billion annually, with free cash flow at $4.3 billion.

That leaves plenty to cover the dividend, some share buybacks, and pay out legal expenses.

Valuation

Source: Seeking Alpha

For all its problems, 3M’s stock isn’t cheap relative to its peers.

Trading at 18.2x forward earnings, that’s in line with American Airlines (AAL) and United Postal Service (UPS), while a bit higher than Caterpillar (CAT).

At 12.1x operating cash flow, 3M is similar to Caterpillar and UPS, though cheaper than Dycom Industries (DY).

Growth

Source: Seeking Alpha

Stretched out over five years, 3M has the worst average annual revenue growth.

Its dwindling profitability is only matched by UPS, which recently took a huge cost hit when it renegotiated its union contracts.

And 3M’s forward outlook isn’t all that pretty.

Profitability

Source: Seeking Alpha

3M may boast the highest gross margins. And even its EBIT margin is solid.

If we back out the legal costs, 3M’s net income margin would land at 15.8%, which is higher than all in this list save Caterpillar.

Our Opinion 3/10

We believe the recent jump in share prices is due to the company’s not being as bad as everyone expected rather than actual excitement.

CEO Brown hasn’t laid out a strategic vision other than to cut costs. There’s no mention of AI or rejuvenating the culture of innovation.

Sure, the stock is cheap. But so are other industrial companies. And at least the others have a story to tell.

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