Is 3M Oversold At $155?

by Trefis Team
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Despite almost an 11% decline in 3M’s (NYSE:MMM) stock since the beginning of this year, at the current price of around $155 per share, we believe 3M has a significant upside. Why is that? The key is 3M’s stock is -29% lower than it was at the beginning of 2018, a little over 2 years ago. Our dashboard, ‘What Factors Drove -29% Change In 3M’s Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of the 3M’s stock price decline over the last 2 years is justified due to its lackluster earnings. The company’s revenues were up a mere 1.5% from 2017 to 2019, due to the impact of acquisitions and divestitures, as well as foreign currency translation. Adjusted net income margin also declined 120 bps from 17.8% in 2017 to 16.6% in 2019. Earnings (Non-GAAP) growth on a per share basis came in at a negative 0.8%, though it was partly aided by massive share buy-backs. Specifically, the company has invested about $6.3 billion in repurchases in the last two years, resulting in about 4.5% lower shares outstanding. While 3M did have about $4 billion in cash as of the last report, we believe it will likely be challenging for the company to sustain this level of buybacks in the near term. In fact, the company has recently announced suspension of its share repurchase program. 

Finally, 3M’s P/E ratio declined from 24.0x in 2017 to 17.2x recently. While 3M’s P/E is down to about 17.2x now, given the volatility of the current situation, there is a significant additional possible upside for 3M’s multiple when compared to levels seen in the past years – P/E of 24.0x at end of 2017, and 19.2x in 2019.

So what’s the likely trigger and timing to this upside?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity, and people are confined to their homes. There has been a massive surge in demand for safety products, such as N95 respirator masks, and personal protective equipment, for which 3M is the largest manufacturer. Its current capacity of N95 respirators is 1.1 billion, and it plans to increase it to 2 billion by the end of the year. The demand over the recent months have led to over 300 bps operating margin expansion for the company’s Safety & Industrial segment (in Q1). The demand for safety products is expected to remain robust even after the COVID-19 crisis winds down, and the company’s focus on cost control will likely result in better margins going forward. The company’s Health Care segment has seen benefits from Acelity and M*Modal acquisitions. Acelity specializes in advance wound care while M*Modal makes cloud-based AI powered systems for patient narratives. These will likely bolster segment revenue growth going forward, and once the integration is completed, segment margins will likely improve.

Between January 31st and April 29th, 3M stock is down 1.5%, vs. a 8.9% decline in the S&P 500. A bulk of the decline in the stock markets came after March 6th, when an increasing number of coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. Despite these concerns, the outperformance of 3M’s stock can largely be attributed to its supply for safety products across the globe.

3M is not immune to the ongoing crisis, and its sales are likely to take a hit for the full year, especially in Q2. While the company’s management withdrew its guidance, it expects y-o-y decline in top and bottom line in Q2. Total revenues could see a 3% dip while earnings could drop 10% y-o-y, per the current average consensus estimates for full year 2020. Going by our valuation for 3M, we believe that there is an upside opportunity of over 15% from the current levels, as the company’s P/E is at a multi-year low of 17.2x currently (based on 2019 adjusted earnings).

While both 3M and Honeywell are making masks, 3M compared to Honeywell appears to be a better bet.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

See all Trefis Price Estimates and Download Trefis Data here

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