3M Company (NYSE:MMM) has gained roughly 40% since the March 23 lows of this year, while Avery Dennison stock (NYSE:AVY), a global materials science company best known for its labeling products, has fared slightly better and gained 48% of its value. The lockdown in various parts of the world has had a negative impact on the industrial companies with operations at limited capacity and lower end consumer demand. However, we believe 3M will likely fare better than Avery Dennison because of its valuation and visible trends. Specifically, 3M is manufacturing billions of respirators to be supplied globally, and it has spun-off its low-margin drug delivery business. This will likely aid 3M’s margins over the coming years.
Our conclusion is based on our detailed dashboard analysis, ‘3M looks attractive compared to Avery Dennison‘, wherein we compare trends in key metrics for the two industrial companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.
Why Has Avery Dennison Outperformed 3M Over Recent Weeks?
Avery Dennison’s P/E based on 2019 earnings has declined from 36x at the end of 2019 to 32x currently, while 3M’s multiple has decreased from 22x to about 21x. The narrower decline in 3M’s multiple can be attributed to steady growth in its personal safety products, which to some extent has been able to offset the decline in other segments thus far in 2020. The company has so far shipped 800 million respirators and aims to reach the 2 billion mark by the end of the year, reflecting a 3x y-o-y growth. Though the overall contribution of personal safety products to the company’s top line was only 11% in 2019, it has increased to 14% in the first half of 2020, and it will likely end at even higher levels toward end of the year.
However, Avery Dennison’s multiple still appears high, considering that the company’s revenues and margins are also at risk given the overall decline in apparel production. Notably, 3M’s P/E is around the mid-point of the range seen over the recent years, and it is marginally higher than the figure at the end of 2018. On the other hand, Avery’s P/E is 2x higher than the level seen at the end of 2018 – indicating that the market hasn’t quite priced in the negative impact of weaker revenues and margins on the company’s stock. This leads us to believe that Avery’s stock could be vulnerable compared to 3M.
But How Long Before The Economy Recovers And 3M’s Stock Gains?
- The expected timeline for recovery in global economic conditions, and further a rally in 3M’s stock, hinge on the broader containment of the coronavirus spread. 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 and complements our analyses of the coronavirus outbreak’s impact on a diverse set of 3M’s multinational peers, including Honeywell and Johnson Controls. The complete set of coronavirus impact and timing analyses is available here.
- There are signs of recovery in demand for most sectors already in Q3, with gradual lifting of lockdowns and a gradual rise in the number of Covid-19 cases remaining within the manageable capacity of hospitals and care providers. In fact, elective surgeries which were deferred earlier in Q2 are now being attended to.
- Although most companies will report poor full year 2020 results, market expectations will be buoyed by a visible improvement in the situation on the ground.
Overall, we believe 3M’s stock price at levels of $165 provides a buying opportunity for investors willing to be patient.