Will DexCom Offer Better Returns Than 3M Stock?

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Given its better prospects, we believe DexCom stock (NASDAQ: DXCM) is a better pick than 3M stock (NYSE: MMM). Although these companies are from different sectors, we compare them because of their similar market capitalization of around $50-60 billion. Investors have assigned a higher valuation multiple of 13x for DexCom stock versus 1.7x for 3M due to its significantly superior revenue growth, profitability, and financial position. In the sections below, we discuss why we believe that DXCM will offer better returns than MMM in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of 3M vs. DexComWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. DexCom Stock Has Fared Better Lately

MMM stock has seen a decline of 15% from levels of $120 in early January 2021 to around $100 now, while DXCM stock has seen strong gains of 45% from levels of $90 to $130 over the same period. In comparison, the S&P 500 has seen an increase of about 40% over this roughly three-year period.

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Notably, MMM stock has underperformed the broader market in each of the last three years. Returns for the stock were 5% in 2021, -29% in 2022, and -2% in 2023. The increase in DXCM stock has also been far from consistent. Returns for the stock were 45% in 2021, -16% in 2022, and 10% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that MMM underperformed the S&P in 2021, 2022, and 2023, and  DXCM underperformed the S&P in 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 GE, CAT, 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.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MMM and DXCM face a similar situation as they did in 2023 and underperform the S&P over the next 12 months — or will they see a recovery? While we expect both stocks to see higher levels over the next three years, we think DXCM will fare better between the two.

2. DexCom’s Revenue Growth Is Better 

DexCom’s average annual revenue growth of 23% over the last three years has been much better than just 1% for 3M.  3M’s revenue rose from $32.2 billion in 2020 to $32.7 billion in 2023, while DexCom saw its top-line swell from $1.9 billion to $3.6 billion over the same period.

3M did see a spike in sales in 2021, owing to a very high demand for masks and personal protective equipment due to the spread of Covid-19. However, its sales declined around 8% between 2021 and 2023 post pandemic. 3M’s other businesses also took a hit due to supply chain disruptions, high inflation, a strengthening dollar, and slowing economic growth. 3M’s consumer business has also been facing headwinds lately, amid lower automotive aftermarket, home improvement, auto-care, and packaging sales. Furthermore, 3M is also facing litigation alleging that its earplugs caused hearing damage for more than 200,000 veterans and its use of per-and polyfluoroalkyl substances (PFAS) contaminated soil and drinking water, leading to health problems in some communities. However, 3M has been focused on resolving these issues. It will pay a total amount of up to $6 billion between 2023 and 2029 to resolve the earplugs’ litigation, and $10 billion payable over 13 years to resolve the “forever chemicals” litigation.

Looking at DexCom, new customer additions are leading the revenue growth, amid rising awareness of CGM devices. DexCom is among the few players with regulatory approvals for its wearable continuous glucose monitoring (CGM) device. The company added 600,000 new users, taking its total customer base to 2.3 million in 2023. The company garners recurring revenues from selling the disposable sensors to go with its device. Note that disposable sensors account for 90% of the company’s total sales, and as its user base continues to expand, DexCom should continue to see a rise in its recurring revenue from these sensors.

Our 3M Revenue Comparison and DexCom Revenue Comparison dashboards provide more insight into the companies’ sales. Looking forward, revenue for 3M is expected to rise in the low single-digits, compared to the high-teens average annual rate for DexCom over the next three years. Note that 3M has spun-off its healthcare business last month. This business accounted for a quarter of the company’s total sales. As such, the adjusted sales figure for 2024 is expected to be around $24 billion and growing at a low single-digit annual rate from there for the next three years. The adjusted figures are not captured in the dashboard links above.

3. DexCom Is More Profitable And Offers Lower Financial Risk

3M’s reported operating margin stood at -27.6% in 2023, compared to 21.5% in 2020, while DexCom’s operating margin expanded slightly from 15.5% to 16.5% over the same period. DexCom’s adjusted operating income was higher at 19.8% in 2023.

Note that 3M’s reported operating margin was significantly impacted due to the settlement of litigation discussed above. The company took a pre-tax charge of $10.3 billion (recorded in Q2’23) related to its proposed settlement agreement regarding PFAS litigation, and the settlement for Combat Arms in Q3’23 resulted in a pre-tax charge of $4.2 billion. On an adjusted basis, its operating margins stood at 20.3% in 2023. For the last twelve-month period, DexCom’s reported operating margin of 17% fares much better than -27% for 3M.

Looking at financial risk, DexCom fares better. Its 5% debt as a percentage of equity is much lower than 30% for 3M. Also, its 43% cash as a percentage of assets is higher than 12% for 3M, implying that DexCom has a better debt position and more cash cushion.

4. The Net of It All

We see that DexCom has seen better revenue growth, is more profitable, and has a better financial position. Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe DexCom is the better choice of the two.

Let us compare the valuation multiples for both stocks against their historical average. 3M’s stock currently trades at 1.7x trailing revenues, vs. the last three-year average of 2.2x. In contrast, DexCom is trading at 13x revenues, compared to its last three-year average of 16.4x. This implies both stocks have similar growth potential if the valuation multiples were to return to their historical averages. However, we think there are more positives to look forward to for DexCom.

3M has taken several initiatives to improve profitability, including the divestiture of Solventum and the resolution of its major litigation. Still, there are near-term risks, including challenging macroeconomic factors, falling sales, and a weak consumer demand environment, that could adversely impact the company’s earnings growth.

In the recent past, there have been concerns over DexCom’s growth potential, given the success of Novo Nordisk and Eli Lilly with their obesity drugs, and the ability of some drugs to reduce the risk of cardiovascular events. However, a CGM device will likely be a helpful tool to monitor the effectiveness of the drugs on a patient. DexCom in its recent press release stated that while the new obesity drugs are helpful in treating type 2 diabetes, the use of a CGM device can strengthen their impact. We think DexCom will continue to see a steady rise in its customer base as well as the demand for its disposable sensors.

While DXCM stock may outperform MMM, 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 May 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 MMM Return 5% 13% -7%
 DXCM Return 2% 5% 769%
 S&P 500 Return 5% 11% 137%
 Trefis Reinforced Value Portfolio 6% 6% 653%

[1] Returns as of 5/16/2024
[2] Cumulative total returns since the end of 2016

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