The Fall of an American Industrial Icon
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There was a time when 3M Corp. (MMM) was a staple in every investment portfolio. Today, the company is trying desperately to regain its former glory and innovative prowess. Back in August, we gave this stock a 3/10 rating. At the time, shares had jumped from $105 to nearly $130. After yesterday’s earnings, shares popped up over $140 before quickly giving up all the gains. Yet, the move got the attention of retail and pro traders as search volume surged three-fold, according to our TrackStar data. The 18% year-over-year EPS growth garnered the most attention. However, as our analysis below illustrates, there are far more problems here than most people realize. 3M’s Business From inventing the first waterproof sandpaper in 1921 to creating N95 masks that protected millions during the pandemic, 3M has built an empire on solving problems others overlooked. This $32 billion revenue generator operates across 70 countries. Yet, it has watched its market value plummet from $120 billion in 2019 to about $55 billion today amid mounting environmental liabilities and sluggish growth. 3M segments its business into the following areas:
Its latest quarter showed signs of life, with earnings jumping 18% despite modest 1% revenue growth. Yet this performance comes after years of underdelivering, as legal troubles around PFAS chemicals and combat earplugs have drained billions from the company’s coffers and investor confidence. CEO Bill Brown is attacking these challenges with a back-to-basics approach. |
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The company’s R&D overhaul aims to reverse a decade-long decline in new product launches, with introduction rates expected to climb 10% this year and accelerate in 2025. They’re shifting engineers to focus on high-potential areas like specialty materials while streamlining product development processes. Operationally, 3M has boosted on-time delivery to 89% – up 10 points in just nine months. They’re tackling inefficiencies head-on, implementing new metrics that revealed their largest facilities operate at just 50% efficiency – a number that screams opportunity for improvement. The company is also cleaning house, spinning off its healthcare business and pledging to eliminate controversial PFAS chemicals from its portfolio by 2025. These moves, while costly in the short term, aim to create a more focused and environmentally sustainable 3M. Success will likely depend on their ability to accelerate growth while managing these transitions. Financials
Source: Stock Analysis In 2014, 3M generated $31.8 billion in sales, $5.0 billion in net income, and $6.6 billion in operating cash flow. Today, revenues are 3.8% lower, net income is down 80.1%, and operating cash flow is down 70.0%. This is what it looks like when a company fails to reinvent itself. The balance sheet isn’t awful, with $6.1 billion in cash against $11.3 billion in long-term debt. Yet, the company hasn’t generated or lost any cash from operations in the past nine months. And it’s still forking over around $1.3 billion in Capex while spending $2.4 billion on dividends and $1.1 billion on share buybacks. On top of this, the company agreed to pay $10.3 billion to settle the PFAS claims, along with $6.01 billion for faulty earplugs. This says nothing about the ongoing lawsuits from state attorneys and respirator masks, which leaves a giant question mark over the company. Valuation
Source: Seeking Alpha With the stock’s recent gains, 3M trades at almost 20x forward earnings, in line with its peers like Honeywell (HON). At 13x cash flow, it seems pretty cheap. Yet, that worsens to 19x forward cash flow. Growth
Source: Seeking Alpha On top of dwindling cash flows, 3M’s forward sales outlook shows notable declines. In fact, 3M measures negative or flat growth across nearly every category here. Yet, companies like Powell Industries (POWL) are putting up double-digit sales increases and triple-digit profit gains. Profitability
Source: Seeking Alpha Unsurprisingly, 3M’s profitability, outside of its gross and EBITDA margin, is one of the worst of the group. The levered free cash flow margin displayed above overstates the company’s ability to generate cash, as we explained earlier. Our Opinion 1/10 We’ve dropped our opinion of 3M from a 3/10 to a 1/10. It’s absurd to see management continue to pay dividends and fund share buybacks through debt. The company needs to conserve capital and narrow its focus beyond a ‘back to basics.’ It needs to identify growth opportunities and lean on those. |
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