Is 3M Stock A Buy? Despite exhibiting weakness in recent years, 3M stocks remain an attractive buy as it gives investors a chance to own a high-quality stock at a low valuation.
Today’s environment is not the best of times for industrial conglomerates like 3M. Nevertheless, the company posted strong third-quarter 2020 results.
3M’s profits were depressed in the first half of the year, as the raging pandemic disrupted several of the company’s end-markets, including automobile production and electronics.
However, the company made a strong comeback in the latest quarter bolstered by robust demand for the company’s healthcare products during the COVID-19 pandemic with the healthcare sector posting double-digit gains.
The maker of N95 masks reported $2.43 earnings per share (EPS) for the quarter, topping consensus estimate of $2.26, but south of $2.58 that the company earned during the same period in the preceding year, as operating expenses rose nearly 8%.
Third-quarter sales grew 4.5 percent year-on-year to $8.4 billion. Analysts, on average, had expected quarterly earnings of $2.26 per share on revenue of $8.32 billion. From a geographical overview, total sales grew 7.7 percent year-on-year in the Americas and 4.4 percent in EMEA (Europe, Middle East, and Africa).
With the country in throes of a second Covid wave, demand for 3M’s masks is expected to continue in the fourth quarter (3M is the biggest mask maker in the U.S.) with the company stating that it’s on track to churn out 2 billion N95 masks by the end of 2020.
It is to be noted that the pandemic caused the demand for N95s (so called because they filter out 95% of airborne particulates, including viruses) to jump 40-fold as request soared from hospitals, Covid-19 testing sites, dental clinics, and many other facilities.
Also, despite the Pfizer and Moderna breakthrough vaccine, it doesn’t mean the end of face masks yet. Pfizer/BioNTech claimed its vaccine protected more than 90% of recipients whereas Moderna raised further hopes after announcing its experimental vaccine to be 94.5% effective against coronavirus.
Experts, however, believe that the availability of vaccines does not mean that we can give up present restrictions and go back to life before Covid-19; which means 3M’s N95 masks will continue flying off the shelves.
Is 3M Stock A Buy?
Sales from three of the company’s four main businesses rose with sequential improvement across businesses and geographies. Its healthcare unit was the biggest gainer, recording a 25.5% jump and accounting for more than a quarter of the company’s total sales.
Sales at 3M’s biggest unit, safety and industrial, rose close to 7%, as auto body shops reopened after opening restrictions were lifted. The consumer segment grew 5.6 %.
The transportation and electronics unit, which makes everything from computer screen filters, office supplies, to auto parts, and healthcare and oral care products, proved to be a laggard, as the revenue declined 7.1% driven by COVID-19-related headwinds.
The restart of global economies and easing lockdowns means that things are only going to improve further from here for 3M. The company acts as a supplier to many other manufacturers and recovery in both, automotive and electronics, sectors is further going to prop up its bottom line.
Also, the healthcare segment took a big hit in the second quarter as many hospitals and patients deferred elective surgeries. Moreover, dental clinics, for the most part, were closed during the lockdown which further wreaked havoc on the company’s healthcare unit. However, as mentioned above, the healthcare unit was the biggest revenue generator in the third quarter as many states allowed elective surgeries and dental offices reopened.
Additionally, the company is one of the best dividend payers with an impeccable record of paying uninterrupted dividend for the past 100+ years, while raising it for 60+ consecutive years.
3M has been a difficult stock to hold over the past couple of years, with falling value and a lot of negative sentiments, courtesy dozens of lawsuits. However, it appears that the worst is over for the company from the perspective of the pandemic and global economic meltdown. With lowering debts, reopening of businesses and dividend yield of more than 3.5%, 3M is a good long-term buy.
Risks of Investing In 3M
3M has lost roughly a third of its value over the past three years, with the stock down about 7% or so in 2020.
Low valuation is always a temptation for investors, but then a stock like that of an industrial icon such as 3M, trading near a three-year low, demands a closer scrutiny of the business.
Like the heavy-duty duct tape it makes, 3M is a strong company. Overall, 3M’s performance has been well above average, despite the pandemic headwinds it’s facing.
For example, it topped Wall Street estimates for third-quarter profit and revenue on surging demand for its healthcare products during the pandemic. More importantly, three of its four segments came in the black with the healthcare unit being the star performer.
However, analysts warn that the company still faces several risks, apart from a downbeat global economic outlook. At first glance, a careful assessment of opportunities against risk does not seem to strongly favor 3M.
Despite the second Covid wave and a mad scramble for 3M’s respirator masks, the company’s potential revenue from them isn’t exactly a needle-mover. And the pandemic continues to nibble at overall revenue.
But, most important of them all, past issues, such as PFAS liabilities, could still come back to haunt the company. A chemical company not having to deal with a litany of lawsuits is harder to find than an honest politician.
If a popular product turns out to be hazardous, or there is some flaw in the manufacturing process that could harm the population or the environment, a company can very well see itself staring at dozens of lawsuits seeking billions in legal fees, fines, or damages.
Like its rival DuPont [NYSE: DD], 3M too has been slapped with a lot of lawsuits. The company is facing litigations related to asbestos exposure, but, more importantly, the company has been involved in multiple cases related to alleged releases of Perfluorooctanoic acid (PFOA) to the water from its manufacturing facilities.
Even though 3M completely ceased all manufacturing and use of PFOA way back in 2008, quite a few action lawsuits are already pending against 3M. In February 2018, 3M agreed to a $850 million settlement with the state of Minnesota over allegations that its production of PFCs (perfluorinated chemicals) had polluted drinking water in the state. Several states filed lawsuits against PFAS manufacturers, including DuPont, Chemours and 3M to address PFAS contamination.
The Maplewood-based industrial giant also settled a $35 million case with an Alabama water authority in April to treat PFAS chemicals that leaked into the Tennessee river.
More unfavorable judgments like the one above could severely impact the company’s reputation as well as its bottom line. However, companies like 3M expect such lawsuits and, as such, set aside a tidy sum to cover the costs.
That said, 3M, despite all the legal challenges, is a huge company with a roughly $100 billion market cap. The company’s large size, huge assortment of products and its stature, along with an investment-grade credit rating, ensures 3M can take the legal hit without facing any existential threat.
In other words, 3M faces real legal troubles, but then it also has the arsenal to deal with it. More to the point, it looks like all of these negative factors are already priced in the risk at this point, considering their below-average performance for the past few years.
All in all, at today’s prices, 3M is a good investment opportunity. Investors can collect an above-average dividend yield while waiting for its shares to capture its previous glory.
Are 3M Competitors A Threat?
General Electric [GE], Danaher [DHR], Tyco International and Honeywell [HON] are considered to be 3M’s primary competitors. While that’s technically accurate, it fails to showcase the complete picture.
3M, like GE and Honeywell, sell a few products directly to consumers. Also, like GE and Honeywell, 3M’s sheer size, with billions in sales, serves a huge competitive advantage.
On the other hand, you would generally consider large industrials to make big complex machineries, as is the case with Honeywell and GE, which, among other things, makes aircraft engines.
In sharp contrast, 3M makes a lot of products that could easily fit into your shopping bag. Its healthcare division, for example, which was the biggest gainer in the recent quarter, consists of a wide variety of small, single-use products such as masks, antiseptics, medical tape and adhesive, to name a few.
GE healthcare, in contrast, sold its disposables unit in 2013 to concentrate on large equipment’s such as MRI and ultrasound machines.
Selling small single-use items means a steady stream of cash flow for the company. A hospital, for example, facing resource crunch may postpone its decision to buy an MRI machine for a couple of years, but it cannot put off buying surgical gloves and tapes.
3M’s sheer size and its massive product portfolio means it competes with dozens of other companies in several other product categories. As far as its chemical products go, it competes with chemical companies such as DuPont or Chemours.
But then, again, it would be a folly to consider 3M solely as a chemical company. 3M makes thousands of products across a very wide spectrum, which means it touches several industrial segments.
It is sort of a hodgepodge of a company – a little bit of consumer, some part healthcare, a little bit of an electronics company and a little bit of materials.
The industrial icon has a broad product portfolio which insulates it to a considerable extent from competition. Also, since the company spends so much money on R&D, any new innovation by a competitor can easily be challenged.
And, most importantly of them all, the fact that there are very few competitors for a large number of its products means the company has little fear of being relegated to the background.
Is 3M Stock A Buy: The Bottom Line
Declining Stock Value
3M’s stock reached its pinnacle in 2018, but since then it has been a downward spiral for the company as stock prices have declined more than 35%.
Over that same span, the S&P 500 index has gained 20%, which means 3M’s performance has been below the broader market.
The management has been working hard to boost revenue and cut costs, but the pandemic has stymied some of those plans, at least temporarily.
A rash of lawsuits against 3M, too, appears to be keeping a lid on 3M’s gain. A wave of litigation related to per- and polyfluoroalkyl substances (PFAS) have intensified concerns that the company’s massive legal and cleanup costs could run in billions.
These synthetic chemicals are found in several products, including nonstick cookware, water-resistant clothes, food packaging and firefighting foams.
Recent studies have been increasingly linking exposure to these group of chemicals to potential adverse health effects, including an increased risk of cancer.
These legal battles have been going on for years and may continue for some time to come. However, 3M is a huge company with the potential to survive a host of negative outcomes.
Some fear the company may resort to cutting dividends to save money for settlement, though, in all likelihood, there’s strong probability that the management will resist such a temptation. The company has been a model dividend-payer which brings us to our next point.
A Diversified Portfolio & High Dividend Yield
The maker of Scotch tapes and Post-it Notes has been hogging the limelight for its N95 respirator masks. However, 3M has an amazing assortment of products in its kitty, more than 60,000 to be precise, with dozens of renowned brands sold globally in over 70 countries.
The company, with a hugely diversified portfolio, truly deserves the title of a Dividend Aristocrat with a hard-to-emulate record of consecutive annual dividend increases for 62 years. The current dividend yield of over 3.5% is high in comparison to the average industrial stock.
3M grappling with a host of issues over the past couple of years, ranging from tariffs to the pandemic, has witnessed its stock price falter, but nevertheless has been working hard to strengthen its financials, and keep pace with the changing times.
3M managed to maintain its impeccable record of increasing dividend even during the pandemic, which speaks volumes about the company’s ability to grow its business and maintain its dividend.
Experts believe only some unprecedented financial catastrophe could force 3M to upend its dividend streak, a very, very remote possibility, given the company’s hugely diversified portfolio, massive market cap and a solid record of judicious capital allocation.
3M’s cash flows, though intermittently erratic, have generally allowed the company to continue with its liberal dividend policy.
Heavy Investment In R&D
3M is a company with a rich history of taking its R& D seriously and investing heavily in it. The company, in fact, has built a solid reputation of developing new products and then using the underlying technology in other areas of its business.
For instance, the company, over the trailing 12 months, has invested a whopping $2 billion in research and development activities. The company’s unwavering focus on R&D ensures it remains relevant in a world of rapid technological changes.
The great news is that the management is putting in more resources in high-margin products in strong segments like healthcare. After getting rid of the lethargic drug delivery unit, 3M is working towards selling of its food safety business.
It is expected that the unit, which sells test kits and other products to help food makers monitor sanitation and allergens, could bring in about $3.5 billion for 3M.
The likely sale of its food safety business would give 3M a healthy dosage of cash injection amid the coronavirus pandemic.
It is to be noted that the food safety business constitutes a minor part of its sprawling health-care unit. It posted $341 million in revenue last year, a meagre 5% of the $7.4 billion generated by the company’s broader health-care unit.
Is MMM Stock A Buy? Conclusion
3M is a big company with a good dividend record. The company, however, is facing a few issues on the legal front while the pandemic has also affected sales, which explains the poor stock performance lately.
However, the automotive industry on the road to recovery would mean more business for the company, which is also poised to benefit from an enhanced global presence through tie-ups and diversification in businesses.
For patient long-term investors, there are more positives than negatives as they can pick up reasonably priced 3M stock now, and start collecting an above-average dividend yield, while waiting for the company to sort things out.
In short, the stock of this high-yielding industrial giant is a lower-risk opportunity with a lot of upside potential.
The 3M Company (officially the Minnesota Mining and Manufacturing Company from its founding in 1902 until 2002) is an American multinational technology and science company with a global presence. It operates in the field of industrial and worker safety, healthcare, transportation, electronics and consumer goods.
The company produces over 60,000 products under several brands, including industrial adhesives and tapes, abrasives, laminates, liquid crystal display (LCD) screens; pressure-sensitive tapes, electronic circuits, skin health and infection prevention products, personal protective equipment, polishing paper, sheets and rolls, paint protection films, surgical, dental, and orthodontic products; filtration products, protective chemicals, micro flex circuits, medical and surgical products, home care and cleaning products, car-care products, healthcare software and optical films, among others. The company, conspicuous among diversified American corporations for achieving growth primarily through internal means rather than large-scale acquisitions, is based in Maplewood, a suburb of Saint Paul, Minnesota.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.