This Industrial Company Is A Better Bet Over General Electric Stock

We believe that 3M stock (NYSE: MMM) currently is an attractive pick over General Electric stock (NYSE: GE), despite 3M’s comparatively higher valuation. MMM stock trades at 2.3x trailing revenues, compared to 1.3x for GE stock. We believe that this valuation gap is justified, given 3M’s superior revenue growth and better profitability. While 3M has seen a substantial rise in revenues since the lockdowns started being lifted, the aviation segment has weighed on the overall revenue growth for GE.

Looking at stock returns, GE, with -12% returns over the last six months, has fared better than MMM, which is down 22%. This compares with a 5% fall in the broader S&P500 index. However, there is more to the comparison, and we believe 3M stands out with higher expected returns than GE, as discussed in the sections below.  We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis – 3M vs. General Electric: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. 3M’s Revenue Growth Over The Recent Years Has Been Stronger

• 3M managed to see sales growth of 10% over the last twelve months, compared to a -2% change for GE.
• Looking at a longer time frame, 3M’s sales grew at a CAGR of 2.7% to $35.4 billion over the last twelve-month period, compared to $32.8 billion in 2018, while GE’s sales declined at a CAGR of -8.4% to $74.2 billion from $97.0 billion over the same period.
• 3M’s revenue growth over the recent quarters is being driven by high demand for safety and personal protective equipment, while sales for some of its other products, including office products, were hit during the pandemic due to many offices being shut, given the lockdowns and shelter-in-place restrictions, resulting in lower demand. The demand for transportation products was also down due to the lower production of cars amid semiconductor chip shortages.
• GE has exposure to the Aviation business, with airlines being one of the worst-hit sectors during the Covid-19 crisis. This has weighed on the company’s overall performance since the beginning of the pandemic. Aviation sales of $21.3 billion over the last twelve months compare with $32.9 billion in 2019, before the pandemic.
• Our 3M Revenue and General Electric Revenue dashboards provide more details on the companies’ revenues.
• The table below summarizes our revenue expectation for both the companies over the next three years and points to a CAGR of 1.6% for both 3M and GE.
• Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

• 3M’s operating margin of 21% over the last twelve-month period is much better than -9% for GE.
• This compares with 19% and -1% figures seen in 2019, before the pandemic, respectively.
• Looking at the recent margin growth, 3M is better, with the last twelve months vs. last three-year margin change at 0.1%, compared to -2.5% for GE.
• Our 3M Operating Income and General Electric Operating Income dashboards have more details.
• Looking at financial risk, 3M trumps GE. 3M’s 21% debt as a percentage of equity is lower than 32% for GE, while its 10% cash as a percentage of assets is higher than 8% for the latter, implying that 3M has a better debt position and cash cushion.

3. The Net of It All

• We see that the revenue growth and profitability have been better for 3M, and it also offers lower financial risk than GE. However, GE is trading at a comparatively lower valuation.
• Looking at prospects, using P/S as a base due to high fluctuations in P/E and P/EBIT, we find 3M to be a better bet of the two.
• The table below summarizes our revenue and return expectation for MMM and GE over the next three years and points to an expected return of 15% for MMM over this period vs. just 3% expected return for GE stock, implying that investors are better off buying MMM over GE, based on Trefis Machine Learning analysis – 3M vs. General Electric – which also provides more details on how we arrive at these numbers.
• It should be noted that GE plans to split into three different companies focused on Aviation, Healthcare, and Energy. The Healthcare business is expected to split in 2023 and Energy in 2024, leaving the Aviation business with GE. This move has largely been seen as a positive for the company, unlocking more value for shareholders, implying that GE stock may see some volatility over the next couple of years.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 3/11/2022
[2] Cumulative total returns since the end of 2016