What’s Next For 3M Stock After A 15% Fall This Year?

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MMM: 3M Company logo
MMM
3M Company

3M (NYSE: MMM) reported its Q4’23 results last month, with revenues and earnings beating the street estimates. The company reported revenue of $8.0 billion and earnings of $2.42 on a per-share and adjusted basis, compared to the consensus estimates of $7.7 billion and $2.31, respectively. While MMM stock has been under pressure in recent quarters amid declining sales and litigation, we think it has ample room for growth from its current levels of around $90. 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 30% 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 -9% in 2023. In comparison, returns for the S&P 500 were 27% in 2021, -19% in 2022, and 24% in 2023 – 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 CAT, GE, and UNP, 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.

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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, we believe MMM stock has ample room for growth. We estimate 3M’s Valuation to be $111 per share, reflecting a 20% upside from its current level of around $90. Our forecast is based on a 12x P/E multiple for MMM and expected earnings of $9.60 on a per-share and adjusted basis for the full year 2024. The 12x P/E multiple aligns with the average value over the last two years.

3M’s revenue of $8.0 billion in Q4 was down 0.8% y-o-y. While Transportation and Electronics segment sales were up 1.6%, all other segments – Health Care, Safety & Industrial, and Consumer – saw sales decline in low single-digits. This can partly be attributed to a continued decline in respirator sales and weakness in consumer demand owing to inflation.

On the positive side, the company saw its adjusted operating margin expand 180 bps y-o-y to 20.9%. Lower revenues and margin expansion led to a 10% y-o-y rise in the bottom line to $2.42 on an adjusted basis in Q4’23. 3M has spent roughly $15 billion in 2023 to settle its key litigations around faulty earplugs and the use of “forever chemicals.” Also, 3M is in the process of separating its healthcare business as a separate company – Solventum. This will help the company raise money to settle the lawsuits. The company expects its adjusted sales to grow between 0.25% and 2.25% and adjusted earnings to be in the range of $9.35 and $9.75 in 2024. The company also expects its operating margin to expand going forward.

There are near-term risks associated with 3M stock. Firstly, challenging macroeconomic factors, falling sales, weak consumer demand environment, and a potential recession could adversely impact the company’s business. The company is focused on restructuring, and that’s going to take some time to complete. The Healthcare spinoff will also result in a loss of earnings, though it plans to retain a 20% stake in Solventum.

However, we think some of these concerns have already been priced in, with its stock trading at less than 10x forward earnings compared to the 12x average over the last two years. In fact, the average P/E multiple over the last five years is even higher at around 16x. A decline in the valuation multiple for 3M makes sense, given the ongoing issues with the company, but we think investors can use the current dip to enter 3M stock for robust gains in the long run. With the initiatives undertaken, 3M is likely to emerge stronger with better margins and earnings growth from 2025.

While MMM stock looks like it has ample 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.

Returns Feb 2024
MTD [1]
Since start
of 2023 [1]
2017-24
Total [2]
 MMM Return -2% -23% -48%
 S&P 500 Return 2% 29% 121%
 Trefis Reinforced Value Portfolio 3% 42% 627%

[1] Returns as of 2/15/2024
[2] Cumulative total returns since the end of 2016

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