What Led To A 40% Fall In 3M Stock Since 2019?

After a 14% fall year-to-date, at the current levels, 3M stock (NYSE: MMM) looks undervalued. 3M stock fell from $122 in early January to $103 now. The YTD -14% return for MMM marks a significant underperformance with the broader S&P500 index, up 0.8%. The recent fall of 3M stock can be attributed to a handful of factors, including litigation involving faulty earplugs, a downbeat Q4, and a guidance miss for 2023, as discussed below.

Looking at the longer term, 3M stock is down 41% from levels seen in late 2019, compared to a 20% rise in the broader S&P500 index. This 41% fall for MMM stock since late 2019 can be attributed to 1. the company’s P/S ratio, which plunged 44% to 1.8x trailing revenues, from 3.2x in 2019, 2. a 2% rise in its total shares outstanding to 589 million currently, partly offset by 3. 3M’s Revenue, which grew 6% to $34 billion over the last twelve months, compared to $32 billion in 2019. Our dashboard – Why 3M (MMM) Stock Moved – details the factors behind this move.

3M benefited from increased personal protective equipment (PPE) demand during the pandemic, aiding its sales growth. The company’s overall revenue growth was also driven by higher price realization and strong consumer demand. But this trend reversed in 2022, with a decline in demand for PPE, supply-chain disruptions, high inflation, a strengthening dollar, and slowing economic growth. These factors led to a 3% fall in sales in 2022.

The company reported sales of $8.1 billion in Q4 2022, down 6% y-o-y and slightly below our $8.2 billion estimate. This can be attributed to unfavorable foreign currency translation and lower respirator demand. The operating margin of 19.1% in Q4 was also down 90 bps. The bottom line stood at $2.28, compared to $2.45 in the prior-year quarter, and was below our estimate of $2.40. 3M expects its 2023 sales to decline between 2% and 6% and its bottom line to be between $8.50 and $9.00, compared to the $9.88 it reported in 2022. This did not sit well with the investors, and MMM stock fell 10% since the company announced its earnings.

3M stock is also being weighed down by the ongoing litigation alleging that its earplugs caused hearing damage for more than 230,000 veterans. 3M has been trying to resolve the claims through the bankruptcy of its subsidiary – Aearo Technologies – which originally made those earplugs. However, a bankruptcy court rejected 3M’s bid to stop the cases against the parent company. ^[1] Furthermore, late last year, a Florida judge prohibited 3M from attempting to escape responsibility for injuries incurred by its allegedly defective earplugs. ^[2]

3M is also involved in the legacy manufacturing of per- and polyfluoroalkyl substances (PFAS) chemical compounds, also known as “forever chemicals,” because they break down slowly in the environment. The company is facing lawsuits over claims that contaminated soil and drinking water led to health problems in some communities. Note that 3M has announced that it would cease all production of PFAS by the end of 2025. However, it will likely face legal action in the coming years. The extent of the liability from these two issues is anyone’s guess, which has weighed on MMM stock.

Still, looking at valuation, MMM stock looks undervalued after its recent fall. At its current level of $103, MMM is trading at 11x its forward expected earnings of $9.11 on a per share and adjusted basis, compared to the last three-year average of 16x. Even if we were to look at MMM stock from a P/S perspective, it is currently trading at just 1.8x trailing revenues, compared to the last three-year average of 2.7x. Our 3M Valuation Ratios Comparison has more details.

A slight decline in the trading multiple is justified, given the uncertainty around the ongoing litigations, but the gap between the current and historical average looks steep in our view. We estimate 3M’s Valuation to be around $127 per share, which is about 23% above the current market price of $103.

While MMM stock looks undervalued, 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 3M vs. AGCO.

With inflation rising and the Fed raising interest rates, among other factors, MMM stock has fallen 28% in the last twelve months. 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.

[1] Month-to-date and year-to-date as of 3/14/2023
[2] Cumulative total returns since the end of 2016

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1. 3M combat earplug lawsuits to proceed, judge rules, despite bankruptcy case, Reuters, Aug 27, 2022 [↩]
2. U.S. judge penalizes 3M, bars it from shifting liability in earplug litigation, Nate Raymond, Reuters, Dec 23, 2023 [↩]