Here’s Why 3M Stock Is A Better Pick Over Its Sector Peer

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MMM: 3M Company logo
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3M Company

We think 3M stock  (NYSE: MMM) is currently a better pick than Emerson Electric stock (NYSE: EMR), given its comparatively lower valuation of 2.0x trailing revenues vs. 2.9x for Emerson. We believe this valuation gap will narrow in favor of 3M, given that both companies have seen similar revenue growth, are equally profitable, and offer identical risk.

Looking at stock returns, EMR, with -1% returns over the last year, has fared much better than MMM stock, down 31%, and the broader S&P500 index, down 19%. There is more to the comparison, and in the sections below, we discuss why we believe MMM stock will offer better returns than EMR stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of 3M vs. Emerson ElectricWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Both Companies Have Similar Revenue Growth

  • Emerson Electric’s revenue growth of 7.6% over the last twelve months is much better than -1.6% for 3M.
  • However, if we look at a longer time frame, both have seen similar revenue growth. 3M’s sales have risen at an average rate of 2.7% to $35.4 billion in 2021, compared to $32.8 billion in 2018, while Emerson Electric’s sales have risen at an average rate of 2.6% to $19.6 billion in fiscal 2022 (fiscal ends in Sep), from $18.4 billion in fiscal 2019.
  • 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.
  • 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.
  • 3M stock was weighed down in 2022 due to its exposure to earplugs lawsuits and concerns over slowing economic growth and its impact on 3M’s businesses.
  • For Emerson Electric, the revenue growth over the recent years has been driven by increasing demand for residential, cold-chain, and professional tools. Both of the company’s segments – Automation Solutions and Commercial & Residential Solutions have seen a steady rise in sales over the recent years, a trend expected to continue in the near term.
  • Note that Emerson Electric has announced divestiture plans for its Climate Technologies business, which accounted for 26% of its total sales in fiscal 2022.
  • Our 3M Revenue Comparison and Emerson Electric Revenue Comparison dashboards provide more revenue details.
  • The table below summarizes our revenue expectation for both companies over the next three years and points to a CAGR of 1.6% for 3M and 6.0% for Emerson.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are 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 forecast 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.
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2. Both Are Equally Profitable And Offer Similar Risk

  • 3M’s operating margin of 21.6% over the last twelve-month period aligns with 21.8% for Emerson Electric.
  • This compares with 19.2% and 16.5% figures seen in 2019, before the pandemic, respectively.
  • 3M’s free cash flow margin of 19.5% is better than 14.9% for Emerson Electric.
  • Our 3M Operating Income Comparison and Emerson Electric Operating Income Comparison dashboards have more details.
  • Looking at financial risk, both are comparable. 3M’s 53.6% debt as a percentage of equity is higher than 24.3% for Emerson Electric, while its 10.5% cash as a percentage of assets is higher than 5.1% for the latter, implying that Emerson Electric has a better debt position, but 3M has more cash cushion.

3. The Net of It All

  • We see that both companies have similar revenue growth, profitability, and financial risk. However, 3M is trading at a comparatively lower valuation than Emerson Electric.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe 3M is likely to offer better returns over Emerson Electric in the next three years.
  • The table below summarizes our revenue and return expectations for MMM and EMR over the next three years and points to an expected return of 18% for 3M over this period and a 10% expected return for Emerson Electric, implying that investors will likely be better off buying MMM over EMR, based on Trefis Machine Learning analysis – 3M vs. Emerson Electric – which also provides more details on how we arrive at these numbers.

While MMM may outperform EMR over the next three years, it is helpful to see how 3M’s 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 at 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 fell 31% over the last year. Can it drop more? See how low 3M stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jan 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
MMM Return 3% 3% -31%
EMR Return -1% -1% 70%
S&P 500 Return -1% -1% 70%
Trefis Multi-Strategy Portfolio 1% 1% 216%

[1] Month-to-date and year-to-date as of 1/6/2023
[2] Cumulative total returns since the end of 2016

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