Will 3M Stock Rebound To Its Pre-Inflation Shock Highs?

-9.08%
Downside
102
Market
93.09
Trefis
MMM: 3M Company logo
MMM
3M Company

3M stock (NYSE: MMM) currently trades at $98 per share, roughly 50% below its level in March 2021, and it has the potential for sizable gains. 3M saw its stock trading at around $129 in late June 2022, just before the Fed started increasing rates, and is now 24% below that level. The stock has lost 11% since September 2022 compared to the S&P 500, which gained about 13% during this period. The decline in 3M stock over the recent past can be attributed to its ongoing litigation around “forever chemicals” and alleged defective earplugs. There were recent reports of 3M being able to tentatively settle some of its litigations related to forever chemicals for $10 billion, lower than anticipated. [1] Furthermore, earlier this week, a U.S. judge allowed delaying a “forever chemical” trial after 3M stated that it was close to a settlement. [2] Still, rising concerns about a potential recession and its impact on 3M’s businesses exist. The decline in 3M’s revenues over recent quarters has also contributed to the stock’s underperformance.

Returning to the pre-inflation shock level means that 3M stock will have to gain 112% from here. However, we do not believe that will materialize any time soon and estimate 3M’s valuation to be around $118 per share, implying about 20% gains. This is because of uncertainties around the litigation, their potential exposure for 3M, and the decline in sales and earnings in the near term. 3M’s operating margin has contracted from 20.8% in 2021 to 18.4% now. Our 3M Operating Income Comparison dashboard has more details. Still, from a valuation perspective, MMM stock appears to have room for growth from its current levels of under $100.

Our detailed analysis of 3M’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

Relevant Articles
  1. With 10% Gains This Year 3M Stock Appears To Be A Better Pick Over Philip Morris
  2. Will DexCom Offer Better Returns Than 3M Stock?
  3. Is 3M Stock Appropriately Priced Around $95?
  4. What’s Next For 3M Stock After A 15% Fall This Year?
  5. After A 14% Fall This Year Is 3M Stock A Better Pick Over Honeywell?
  6. What’s Next For 3M Stock After A 24% Fall This Year?

2022 Inflation Shock

Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
  • April 2021: Inflation rates cross 4% and increase rapidly
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
  • Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how MMM stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

3M and S&P 500 Performance During 2007-08 Crisis

MMM stock declined from $95 in September 2007 (pre-crisis peak) to around $45 in March 2009 (as the markets bottomed out), implying MMM stock lost nearly 52% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $83 in early 2010, rising 82% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

3M Fundamentals Over Recent Years

3M revenues rose from $32.1 billion in 2019 to $35.4 billion in 2021, as the Covid-19 outbreak resulted in very high demand for respirators and other personal protective equipment. Revenues declined gradually over 2022 before reaching $33.4 billion in the last twelve months due to lower demand for respirators and divestitures. 3M’s reported earnings increased from $7.83 in 2019 to $10.21 in 2022. On an adjusted basis, earnings rose to $10.10 in 2022 vs. $8.88 in 2019.

Does 3M Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

3M’s total debt decreased from $20 billion in 2019 to $16 billion in 2022, while its total cash increased from around $2.5 billion to $3.9 billion over the same period. The company garnered $6 billion in cash flows from operations in 2022. 3M appears to be in a comfortable position to meet its near-term obligations, given its cash position.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe 3M (MMM) stock has the potential for solid gains once fears of a potential recession are allayed. That said, the uncertainties around its litigations and near-term revenue headwinds remain a risk factor to realizing these gains.

While MMM stock looks like it can see some gains, 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 18% this 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? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

Returns Jun 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 MMM Return 6% -18% -45%
 S&P 500 Return 2% 11% 91%
 Trefis Multi-Strategy Portfolio 3% 13% 255%

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

Invest with Trefis Market Beating Portfolios
See all Trefis Price Estimates

Notes:
  1. 3M Is in at Least $10 Billion Forever-Chemicals Pollution Settlement, Jef Feeley, Bloomberg, June 2, 2023 []
  2. U.S. judge allows 3M, Florida city to delay ‘forever chemicals’ trial, Maria Ponnezhath and Clark Mindock, Reuters, June 6, 2023 []