VALUATION HIGHLIGHTS

1. Safety & Industrial constitutes 47% of the Trefis price estimate for 3M's stock.
2. Transport & Electronics constitute 27% of the Trefis price estimate for 3M's stock.
3. Consumer constitutes 26% of the Trefis price estimate for 3M's stock.

WHAT HAS CHANGED?

1. Solventum Spin-off

3M on April 1, 2024, completed the planned spin-off of its health care business, which is now an independent company — Solventum – and is listed on the NYSE as SOLV. 3M now has three segments – Safety & Industrial, Transportation & Electronics, and Consumer.

2. MMM Stock Performance
   • MMM stock has faced a notable decline of 25% from levels of $120 in early January 2021 to around $90 now (early April 2024), vs. an increase of about 35% for the S&P 500 over this roughly three-year period.
   • Notably, MMM stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 5% in 2021, -29% in 2022, and -2% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that MMM underperformed the S&P in 2021, 2022 and 2023.

3. Q4 2023 Earnings
   • 3M reported a 0.8% revenue decline to $8.0 billion in Q4 2023. Transportation and Electronics segment sales were up 1.6%, while all other segments — Health Care, Safety & Industrial, and Consumer — saw sales decline in low single-digits y-o-y. Looking at 3M's bottom line, the adjusted EPS of $2.42 was up 11% y-o-y.

4. Impact of Covid-19 On 3M's Stock
   • 3M stock lost more than 34% – dropping from $180 at the beginning of 2020 to below $119 in late March 2020. It currently trades around $90 (through mid-February 2024), reflecting around a 25% fall from the 2020 lows. That means it is still far below the pre-pandemic levels.
   • While the COVID-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March 2020 helped the markets stage a strong recovery. With the economies opening up gradually since 2021, demand for 3M's products and services did pick up, but the demand for its respirator masks that peaked during the pandemic has been falling since. Furthermore, rising costs and the strengthening dollar have weighed on the company's performance in the recent past. The company's exposure to earplugs litigation has also weighed on its stock.

5. Restructuring
   • 3M is in the process of restructuring its businesses. It completed the spinoff of its food safety business and merged it with Neogen in September 2022. It is now working on spinning off its healthcare business and aims to complete the spinoff by the end of 2023. Post restructuring, 3M will be focused on three areas: Safety & Industrial, Transportation & Electronics, and Consumer products.

6. Litigation
   • 3M is facing several lawsuits for its earplugs. The ongoing litigation alleges that 3M's earplugs caused hearing damage for more than 230,000 veterans. 3M has been trying to resolve the claims through the bankruptcy of its subsidiary – Aearo Technologies – which originally made those earplugs. However, a bankruptcy court rejected 3M's bid to stop the cases against the parent company. In fact, veterans are now trying to block 3M's planned spin-off of its healthcare business.

7. Acelity Acquisition
   • 3M completed the acquisition of Acelity for a total enterprise value of $6.7 billion through debt and available cash in 2019. Acelity is a medical technology company that provides advanced wound care and specialty surgical applications under the Kinetic Concepts (KCI) and Systagenix brands. Acelity and its KCI subsidiaries are integrated with 3M's medical solutions business under the Health Care segment.

8. 3M suspends operations at Venezuela subsidiary
   • 3M suspended its local operations in Venezuela for the foreseeable future, citing market turmoil and lower demand in the South American nation. 3M said they took this action "in light of continuing challenging circumstances in Venezuela, including its unstable environment and heightened unrest that has led to a sustained lack of demand" in the Venezuela market. Venezuela's economy has largely collapsed in the past year.

9. Strategy of Portfolio Management
   • 3M has been very active on the M&A front in recent years, having made significant acquisitions such as Scott Safety, Capital Safety, Polypore's Separations Media business, and Ivera. The company has also made an effort to slim down. Some of the big-ticket sales include that of its Static Control and Library Systems businesses and Faab Fabricauto.
   • In the last ten years, 3M has gone from six sectors to four business groups and has pruned its businesses or divisions from 40 to 28, thereby improving customer relevance, productivity, and speed, through a leaner operating structure.
   • 3M was quite active on the M&A front in 2019 and undertook a number of divestitures in its Transportation Safety division with the intent of improving its portfolio. This included the sale of its Identity Management business, Tolling and Automated License/Number Plate Recognition business, and Electronic Monitoring Business. Acquisitions, net of divestitures, increased sales by 5.1 percent.

10. China to Power Growth in the Future
    • 3M has had a presence in China since 1984 when it was the first wholly-owned foreign enterprise that was set up outside the Shenzhen economic zone. The company has grown to over $3 billion in sales from the region and continues to see the country as an attractive growth opportunity.
    • 3M has a solid footing in the country as a result of its base in the infrastructure and manufacturing business. Improvements in the safety, healthcare, and retail businesses in China have helped to spur the growth of these businesses of 3M as well, which currently represent over $1 billion of its $3 billion China portfolio.

    • BUSINESS SUMMARY

      3M is a diversified technology company with a global presence in the following businesses: Safety & Industrial; Transportation and Electronics; Health Care; and Consumer. 3M is among the leading manufacturers of products for many of the markets it serves. Most of its products involve expertise in product development, manufacturing and marketing, and are subject to competition from products manufactured and sold by other technologically oriented companies. Some of the company's most recognizable brands include Scotch Tape products, Post-It notes, ACE bandages, and Thinsulate insulation products.

      3M is widely considered one of the most innovative companies in the world, with a third of the company's sales coming from products that have been launched in the prior five years. The company has benefited from its global footprint, with 60% of its sales coming from international markets.

      SOURCES OF VALUE

      We estimate that the Safety & Industrial business constitutes around 36% of 3M's value, while the Health Care constitutes 29%, Transport & Electronics 21%, and Consumer divisions contribute 14%. The following factors are also helping to drive the company's value.

11. Consistent innovation and aggressive acquisitions drive Industrial market share
    • The company's heavy R&D focus has resulted in innovative and unique products. We expect that the company's focus on high-growth areas, like renewable energy and bioplastics, will allow the company to maintain its market share in the face of increasing international competition. 3M will also benefit from increased demand from automotive, aerospace, and industrial adhesives and tapes customers, with its growth driven by Asia-Pacific.

12. Maintaining high margins in the Healthcare segment is paramount
    • 3M's Healthcare margins typically range around 30-35%, while those for other divisions are mostly around 25-30%. This is what allows the Healthcare business to contribute such a meaningful percentage of 3M's value. Margins in this business are so high because of the uniqueness of 3M's products and patent protection. Accordingly, the company must continue to be innovative in producing new (patent-protected) products and in protecting its existing patent portfolio.

    KEY TRENDS

13. Coronavirus Crisis
    • With the global economy slowing down due to the impact of Covid-19, consumer spending power declined in 2020. 3M, in particular, navigated well in 2020, driven by its personal safety products (such as masks and PPE), home improvement, and healthcare businesses. With the economic rebound in 2021, 3M's business also grew. However, looking at 2022, the high inflation environment, rising interest rates, and the Russia-Ukraine war weighed on its business.

14. Growth in emerging markets
    • Emerging economies, such as India and China, will drive significant growth in many of 3M's markets in the near term. As the middle class grows in these countries and disposable income increases, we expect substantial growth in demand for consumer goods and household products while rapid industrialization will drive growth in demand for office supplies and specialty chemicals. Lastly, with more readily available healthcare, we expect the medical device markets in these countries to grow rapidly.

15. Shorter product life cycles
    • Given some of the rapidly advancing markets in which the company competes (particularly technology and healthcare), product life cycles are shortening by the day. While this will benefit innovative companies like 3M, it will also likely increase R&D requirements.

16. Strong U.S. dollar presents headwinds
    • 3M operates all over the globe which means that it has to deal with a number of currencies. Due to the significant strength of the U.S. dollar, FX has tempered its earnings of late.