Why Is 3M Stock Going Up?

After a decade-long slump in new product introductions, the leading technology firm, 3M Company (NYSE:MMM), is now experiencing a positive change with product SKUs up 10% and more growth anticipated on the horizon.

The comeback in product diversity may be one reason the stock was up about 40% last year but there’s lots more to like.

The company is strong, with a good amount of cash coming in, improving profit margins, and plans that focus on making shareholders even happier.

With these in mind, can 3M sustain the positive upward trajectory? 

SKU Launch Times Cut Drastically

3M management deserves a good deal of credit for essentially rewriting its innovation playbook. By crystalizing product launch schedules and improving sales monitoring post-product launches, the top brass are putting more careful planning into each step of a product’s life cycle.

For a company with so many SKUs, getting to market quickly is a big deal and 3M is doing a better job at speeding up new idea creation and translating it to new product lines. One really remarkable stat for a company operating at such scale is that SKU launch times are down from 100 days last year to only 60 days this year.

To remove slowdowns and further cement the uptick in innovation, management has also reallocated budgetary funds to accelerate R&D. The outcome is faster transitions from lab to the testing stage to actually making products. This rapidity is providing 3M with the ability to introduce innovative products to market more quickly and with better efficiency.

Third-Quarter Highlights Show Sales & Cash Up

During Q3, 3M’s net sales went up by 1.5% to reach $6.07 billion while adjusted operating income went up 8.1% compared to last year, and hit $1.40 billion. The adjusted EBITDA increased 3.9% from the same quarter of the previous year to $1.68 billion.

Profits kept rising, with adjusted net income and earnings per share from ongoing operations rising by 17.2% and 17.9% on a year-over-year basis, hitting $1.10 billion and $1.98 respectively.

The company is clearly cash rich too with $6.05 billion on hand, a marginal increase from the $5.74 billion it had on December 31, 2023. Meanwhile, total current assets reached $16.30 billion.

Dividend Payout Ratio Is Low For Such a Giant

In November, the Board of Directors declared a dividend of $0.70 per share for Q4 and pays out $2.80 per share, which translates to a yield of 2.17% at current price levels.

Even though this is a bit less than the four-year average dividend yield, which is 3.81%, the reasonable payout ratio of just 55% is arguably the most attractive quality for income investors.

Profitability That Stands Out

3M’s trailing-12-month gross profit margin is 45.07% ranks well above peers, in fact a full 43.7% better and that’s indicative of a moat that will attract value investors.

Similarly when comparing to competitors, the trailing-12-month EBITDA margin of 24.87% is impressive, 76.9% higher than the industry average, which is 14.06%.

In addition, 3M’s trailing-12-month net income margin stands head and shoulders above rivals at 13.45%, a full 108% higher compared to the sector average of 6.47%.

Turning to the oxygen of the business, cash flows, 3M has a good track record of performing very well. Its trailing-12-month levered FCF margin of 9.59% is higher than the industry average of 6.67% by 43.9%. Plus, its trailing 12-month cash from operations reaches $1.99 billion, which shows an increase of about 468.1% when compared to the sector average, which stands at $349.79 million.

Cash Flows Remain A Key Focus

3M’s full-year forecast is for adjusted organic growth of around 1%, with expectations for different segments staying unchanged. Adjusted operating margins for the whole year are expected to go up by 250 to 275 basis points, above the prior range’s lower end.

In a show of confidence, 3M has increased the lower end of its EPS guidance by $0.20, so now management expects it to be between $7.20 and $7.30. Higher cash flows are still a very important part of 3M’s financial plan with the year-to-date conversion at 102% and adjusted free cash flow conversion is expected to go eclipse 100% for the full year.

Why Is 3M Stock Going Up?

3M stock has been going up because of stellar fundamentals as exemplified by a perfect Piotroski Score of 9 and a forecast for rising net income this year.

Analysts are also forecasting revenue will go up by 2.9% to $24.51 billion, and EPS will grow 8.5%, reaching $7.91. Also, 3M has done better than expected on both revenue and EPS in all four of the last quarters.

Research analysts are largely positive about 3M’s stock with a consensus price target of $146.68 per share, although it should not be overlooked that a discounted cash flow forecast does not quite tally with that given fair value of $119 per share.

Adding to the attractiveness is 3M’s discounted valuation. The forward non-GAAP P/E of 17.56x for 3M is about 15% less than the industry average, which is at 20.66x. Similarly, its forward EV/EBITDA of 11.76x is 2.3% below the sector average of 12.04%, and its forward EV/EBIT of 15.02x is 12.3% lower than the industry standard of 17.13%.

---

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.