3M (NYSE: MMM) recently reported its Q3 results, with revenues falling below and earnings beating the street estimates, and we believe that MMM stock has room for growth, as discussed below. The company reported adjusted revenue of $8.0 billion and adjusted earnings of $2.68 per share, compared to the consensus estimates of $8.2 billion and $2.48, respectively. In this note, we discuss 3M’s stock performance, key takeaways from its recent results, and valuation.
MMM stock has suffered a sharp decline of 50% from levels of $175 in early January 2021 to around $90 now, vs. an increase of about 10% for the S&P 500 over this roughly three-year period. Notably, MMM stock has underperformed the broader market in each of the last three years. Returns for the stock were 2% in 2021, -32% in 2022, and -24% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 9% in 2023 (YTD) – indicating that MMM underperformed the S&P in 2021, 2022, and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including UNP, UPS, and HON, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MMM face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery? From a valuation perspective, MMM stock looks like it has room for growth. We estimate 3 M’s Valuation to be $107 per share, reflecting an 18% upside from its current level of $91. Our forecast is based on a 12x P/E multiple for MMM and expected earnings of $9.02 on a per-share and adjusted basis for the full year 2023. The company raised its earnings outlook to now be in the range of $8.95 to $9.15 (vs. $8.60 to $9.10 prior guidance).
3 M’s revenue of $8.3 billion (GAAP) in Q3 was down 4% y-o-y. All four segments – Health Care, Safety & Industrial, Transportation & Electronics, and Consumer – saw sales decline y-o-y. 3M is struggling to expand its top line. This can partly be attributed to a decline in respirator demand post-pandemic. However, its other businesses, including Consumer, haven’t been able to offset this fall. In fact, Consumer sales are down 6% for the nine-month period ending Sep 2023. The company stated that consumers are spending more on essential purchases, weighing on its segment sales. Now, in a recession scenario, this trend would imply a more meaningful impact on 3M’s business.
On the positive side, the company saw its adjusted operating margin expand 160 bps y-o-y to 23.2%. Lower revenues and margin expansion led to a 2% y-o-y rise in the bottom line to $2.68 on a per-share and adjusted basis in Q3’23. This can primarily be attributed to the impact of the Earplug settlement added to adjusted earnings.
Although MMM stock is trading at just 1.5x sales compared to the last five-year average of 2.8x, a slight decline in the valuation multiple is justified, in our view, given the decline in sales. Still, the correction appears meaningful from the historical average, and 3M stock will likely see higher levels over time. Challenging macroeconomic factors, falling sales, and the impact of a potential recession on the company’s business are some risk factors to realizing these gains.
While MMM stock looks like it has room for growth, 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.
|S&P 500 Return||0%||9%||87%|
|Trefis Reinforced Value Portfolio||0%||18%||504%|
 Month-to-date and year-to-date as of 11/1/2023
 Cumulative total returns since the end of 2016