We think industrial companies 3M stock (NYSE: MMM) and General Electric stock (NYSE: GE) may offer similar returns over the next few years. Although GE is trading at a comparatively lower valuation of 1.2x trailing revenues than 2.4x for 3M, this gap in the valuation is justified given 3M’s superior revenue growth, profitability, and lower financial risk, as discussed below.
Looking at stock returns, Both MMM and GE have seen a similar decline of around 17% year-to-date, underperforming the broader indices, with the S&P500 index down 10%. In the sections below, we discuss the possible stock returns for MMM and GE in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of 3M vs. General Electric: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. 3M’s Revenue Growth Has Been Better
- 3M’s revenue growth of 2% over the last twelve months is much better than -1% for GE.
- Even if we look at a longer time frame, 3M has posted better sales growth. Its sales rose at an average growth rate of 2.7%% to $35.4 billion in 2021, compared to $32.8 billion in 2018, while GE’s sales declined at an average annual rate of 8.4% to $74.2 billion in 2021, from $97.0 billion in 2018.
- 3M’s revenue growth over the recent years was 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.
- However, this trend has now reversed. 3M is facing a decline in demand for safety and protective gear, while its consumer business, including home improvement, is seeing a pickup in demand post-pandemic.
- GE has exposure to aviation, and airlines were one of the worst-hit sectors during the Covid-19 crisis. This has weighed on the company’s overall performance since the pandemic’s beginning. Aviation sales of $21.3 billion in 2021 compared with $32.9 billion in 2019, before the pandemic.
- As we look forward, GE is expected to benefit from a rebound in air travel demand, with Boeing and Airbus focused on increasing their production.
- Our 3M Revenue and General Electric Revenue dashboards provide more details on the companies’ revenues.
- The table below summarizes our revenue expectation for both 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 those 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 three years before Covid to simulate a 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.
2. 3M Is More Profitable And Comes With Lower Risk
- 3M’s operating margin of 19% over the last twelve-month period is much better than -6% for GE.
- This compares with 19% and -3% figures seen in 2019, before the pandemic, respectively.
- 3M’s free cash flow margin of 19% is also better than 6% for GE.
- Our 3M Operating Income and General Electric Operating Income dashboards have more details.
- Looking at financial risk, 3M trumps GE. 3M’s 23% debt as a percentage of equity is lower than 46% 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 more 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.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both MMM and GE are likely to offer similar returns over the next few years.
- The table below summarizes our revenue and return expectations for MMM and GE over the next three years and points to an expected return of 16% for MMM over this period and a 15% expected return for GE stock, implying that investors can choose either of the two or both if they are looking to invest in the industrial sector, 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 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.
While MMM and GE stocks look like both can see higher levels, it is helpful to see how 3M’s Peers and General Electric Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for GrafTech vs. Footlocker.
With inflation rising and the Fed raising interest rates, among other factors, MMM stock has fallen 17%, and GE stock has fallen 16% this year. Can they drop more? See how low 3M stock can go and how low General Electric stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||4%||-10%||91%|
|Trefis Multi-Strategy Portfolio||5%||-9%||258%|
 Month-to-date and year-to-date as of 8/19/2022
 Cumulative total returns since the end of 2016