3M Company: Is The Recent Dip A Buying Opportunity?
The 3M Company (MMM) has been on quite a roll as of late. As 5-star Nobias Analyst, Lee Samaha noted in a recent article, the stock’s price rose more than 10% in the month of March. However, he notes, “There wasn't any major fundamental news in the month, so the stock price rise was likely caused by a change in investor sentiment.” And yet, this rally presents downside potential because anytime a stock rises on the back of bullish (and potentially greedy sentiment) as opposed to underlying fundamental growth, the risk of a pullback increases (due to the lack of a fundamental floor). Well, that’s exactly what we saw play out after 3M posted Q1 earnings this week.
When 3M reported its first quarter results, we saw the stock beat analyst estimates on both the top and bottom lines. MMM’s revenues totaled $8.9 billion during the quarter, which beat analyst estimates by $460 million and represented 9.6% year-over-year growth. The company’s sales growth was board based across its diverse product offerings. During Q1, 3M’s Safety and Industrial sales grew by 13.1%, its consumer brands posted 9.8% growth, and its healthcare segment posted 6.8% growth.
he company noted that its growth was also strong across all geographic regions, with revenues rising by 18.1% in the Asia Pacific region, by 10.4% in the Europe, Middle East, and Africa region, and by 4.5% in the Americas region.
These higher sales led to positive growth on the bottom-line as well. The company’s earnings-per-share came in at $2.77 on a GAAP and non-GAAP basis, beating GAAP expectations by $0.50/share and non-GAAP expectations by $0.48.share. These two earnings-per-share results represented 23% and 27% growth, respectively, when compared to the company’s GAAP and non-GAAP earnings results from one year ago.
During Q1, the 3M company generated $1.7 billion in operating cash flow and returned $1.1 billion to shareholders ($858 million was paid in dividends and $231 million was dedicated to share buybacks). Looking at the Q1 report it appears that management was quite bullish. Here’s an excerpt from 3M’s press release regarding earnings: "The first quarter was highlighted by broad-based organic growth, robust cash flow and a double-digit increase in earnings per share," said Mike Roman, 3M chairman and chief executive officer. "Our four industry-leading businesses are delivering strong results, while we accelerate 3M's digital transformation and sustainability efforts with significant new goals to improve air and water quality. While uncertainty related to COVID-19 remains, we will stay focused on driving growth, building on favorable market trends, improving operational performance and delivering for customers and shareholders." However, the market did not agree. 3M shares fell roughly $10/share, from the $202 area to the $192 area, representing a 5% dip, on the heels of the Q1 earnings release.
The 3M company has been struggling to generate sustained growth for several years now. In 2018, the company’s full-year earnings-per-share totaled $9.98. During 2019 and 2020, MMM experienced negative bottom-line growth, due in large part to the U.S./China trade war and then the COVID-19 pandemic. In 2021, analysts expect to see a return to growth; however, even if 3M hits the current consensus growth estimate of 12% this year, its earnings-per-share will only total $9.77, still less than it was just several years ago. This turnaround process has been long and arduous. And, as Samaha, writes in a different piece than the one linked above, there is still a lot of uncertainty surrounding 3M’s stock.
In a recent article, previewing 3M’s Q1 prospects, Samaha said, “The good news is that the company has plenty of financial firepower to do so and is actively pursuing changes. The bad news: There's little hard evidence that the restructuring is having a significant impact, and the upcoming first-quarter earnings report on April 27 might confuse more than it clarifies.” Samaha touched upon the company’s recent struggles, saying, “Given weak end-market conditions in recent years, it's understandable if they have performed poorly. However, what isn't forgivable is that the less cyclical segments, namely healthcare and consumer, have disappointed the most.” However, even with the uncertainty clouding the stock’s growth outlook, Samaha is bullish on the company’s ability to generate strong profits, noting, “The company generates bundles of earnings before interest, depreciation, amortization (EBITDA), and FCF.”
What’s more, Samaha highlights the relatively cheap valuation that 3M trades with, relative to its peers. Just before earnings, 3M shares were trading with a 17.5x price-to-free cash flow multiple. With that in mind, Samaha says, “Its price-to-FCF valuation looks cheap, especially compared to a multi-industry peer like Illinois Tool Works, trading at nearly 28 times its FCF.” Due to its post-earnnigs dip, MMM is even cheaper now. With these strong cash flows and relatively cheap valuation in mind, Samaha says, “There is a strong case for buying/holding the stock, but management needs to start delivering in 2021, particularly in the healthcare segment.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
However, he noted that if the company doesn’t raise its guidance during the first quarter results, like he expects so many of MMM’s industrial peers to do in light of the recent broad economic resurgence, then shares would likely continue to languish. Well, during the Q1 report, MMM reiterated previously provided full-year 2021 guidance, calling for earnings-per-share to be in the range of $9.20-$9.70. MMM expects to see full-year sales growth of 5-8% with organic local-currency growth in the 3-6% range.
While sticking with guidance is certainly better than reducing it, it appears that the market was of the same opinion as Samaha, expecting a raise. 3M continues to face pressures related to pollution litigation, which David Trainer, a 5-star Nobias Analyst highlighted in a recent article as having a negative impact on the company’s financial results. This headwind, combined with the continued uncertainty around the company’s restructuring and ongoing tariff related headwinds associated with certain end markets (especially in the automotive space) are likely to continue to serve as hurdles for the stock to clear in terms of rising sentiment and a potential share price rally. However, when looking at the blue chip analyst community, the prevailing sentiment surrounding MMM is a positive one, pointing towards apparent upside potential.
There are 20 bullish ratings by 4 and 5-star rated Nobias analysts, compared to just 7 sell ratings. 3M is a dividend aristocrat, having increased its annual dividend for 63 consecutive years now. The company generates reliable sales and earnings, has a strong balance sheet, and a product portfolio that many of its peers are likely envious of. It appears that the high quality analysts we track believe that the company has what it takes to overcome its short-term issues, meaning that this is a dip that long-term investors may want to seriously consider buying.
Disclosure: Nicholas Ward is long MMM.. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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