Case Study: 3M Company (MMM) stock according to high performing analysts
Key Points
Performance
MMM shares rose by 6.38% this week after rallying by 8.75% on Friday. This rally pushed MMM’s year-to-date losses up to -16.28%. This compares poorly to the S&P 500 which is up by 11.98% on a year-to-date basis.
Event & Impact
On Friday news broke that 3M Company had accepted a tentative agreement with certain U.S. towns and cities regarding its PFAS chemical pollution. The settlement is reported to be at least $10 billion and still requires approval by 3M’s Board of Directors.
Noteworthy News:
Legal headwinds surrounding these “forever chemicals” has cast a major shadow over 3M shares for years. Analysts have speculated that the overall cost of this issue could rise above the $100 billion level across the world. This results in major uncertainty for 3M shareholders moving forward, so settlements, even when costly, can provide a bullish catalyst for investors looking to begin to quantify the potential risk.
Nobias Insights
50% of recent articles published by credible authors focused on MMM shares offer a “neutral” bias. Two of the four credible Wall Street analysts who cover 3M believe that shares are likely to rise in value. The average price target applied to MMM by these credible analysts is $129.00, which implies upside potential of approximately 25.8% relative to the stock’s current share price of $102.53.
Bullish Take Nobias 4-star rated author, Bretty Ashcroft Green, said, “3M's stock jumped more than 10% on Friday morning after Bloomberg News reported the company agreed to a tentative settlement of at least $10 billion with a variety of U.S. cities and towns to resolve water pollution claims tied to "forever chemicals.”
Bearish Take Samuel Smith of Sure Dividend, a Nobias 4-star rated author, stated, “3M is facing a number of uncertainties, including litigation headwinds, and global supply chain disruptions and logistics challenges.”
MMM Jun 2023
3M Company (MMM) rallied by 8.75% on Friday due to positive headlines regarding its potential “forever chemicals” legal liability. The potential for significant legal and cleanup costs associated with the PFAS chemicals that MMM has manufactured over the years has made this stock a recent underperformer.
Even after Friday’s rally, during the trailing twelve month period MMM shares are down by 30.8%. On a year-to-date basis, 3M Company is still down by 16.28%. Yet, this weakness has pushed MMM’s valuation down well below its historical averages and collectively, the credible Wall Street analysts that Nobias tracks believe that 3M offers strong double digit upside potential.
Bearish Nobias Credible Analysts’ Opinions:
In early May, Samuel Smith of Sure Dividend, a Nobias 4-star rated author, provided readers with an annual update on 3M Company shares. Smith began his report by stating, “3M has one of the best track records in the entire market when it comes to dividend longevity. It has paid dividends for more than 100 years, and it has raised its dividend for over 60 years in a row.”
This company is more than a Dividend Aristocrat (companies with 25+ years of consecutive annual dividend increases); MMM is a Dividend King, which are companies with annual dividend increase streaks of 50+ years. Smith wrote, “There are only 48 Dividend Kings, including 3M.”
Looking at 3M’s operations, Smith wrote, “Today, 3M is a large diversified global manufacturer. It manufactures ~60,000 products, which are sold in ~200 countries around the world.”“To raise dividends for more than 60 years requires multiple durable competitive advantages,” he said. “For 3M, technology and intellectual property are its biggest competitive advantages.
“3M has more than 40 technology platforms and a team of scientists dedicated to fueling innovation. Innovation has provided 3M with over 100,000 patents obtained throughout its history, which helps fend off competitive threats,” Smith added.
Smith notes that the company has achieved this by maintaining a well diversified business structure. “3M is comprised of four divisions,” he said.
Regarding those 4 segments, Smith wrote:
The Safety & Industrial division produces tapes, abrasives, adhesives and supply chain management software, as well as personal protective gear and security products.
The Health Care segment supplies medical and surgical products, as well as drug delivery systems.
Transportation & Electronics division produces fibers and circuits with a goal of using renewable energy sources while reducing costs.
The Consumer division sells office supplies, home improvement products, protective materials and stationery supplies.
Looking at the stock’s recent performance, Smith said, “3M has struggled to generate growth over the past few years. Still, 3M maintains a promising long-term outlook.” He continued, “We believe the company is capable of growing adjusted earnings-per-share by 5% per year over the next five years.”
Moving onto MMM’s valuation, Smith wrote, “Based on expected adjusted earnings-per-share of ~$8.75 for 2023, 3M stock has a price-to-earnings ratio of 13.1.”“This is lower than its average valuation,” he added. Smith continued, “Our estimate of fair value is a price-to-earnings ratio of 17, which is a little below its 10-year historical average, but we believe it is warranted due to slowing growth and rising interest rates.” He also touched upon some of the negative catalysts that have inspired this relative undervaluation, writing, “3M is facing a number of uncertainties, including litigation headwinds, and global supply chain disruptions and logistics challenges.”
Bullish Nobias Credible Analysts Opinions:
These litigation concerns were the topic of an article published on Friday by Nobias 4-star rated author, Bretty Ashcroft Green titled, “3M: Positive Lawsuit Developments For This Cheap Dividend King”.
Green quoted a Seeking Alpha headline which read: “3M's stock jumped more than 10% on Friday morning after Bloomberg News reported the company agreed to a tentative settlement of at least $10 billion with a variety of U.S. cities and towns to resolve water pollution claims tied to "forever chemicals.” “Let's take a look at how cheap MMM stock might be after deducting some litigation cost assumptions combined with the exit of 3M's PFAS business come 2025,” he continued.
Green wrote, “I'm going to make a maybe not-so-conservative assumption here and assume that there are $30 Billion in litigation costs to carry forward.” He also noted that things could be worse. “I'm baking in $30 Billion to my equation, some were floating numbers above $100 Billion just for the PFAS portion alone. You never know where this will wind up,” Green said. He compared 3M’s legal issues to the talcum powder headwinds that healthcare company Johnson and Johsnon (JNJ) faces and put a spotlight on a recent $8.9 billion settlement that JNJ agreed to pay. “The proposed settlement would be paid out over 25 years through a subsidiary, which filed for bankruptcy to enable the $8.9 billion trust, Johnson & Johnson said in a court filing,” he wrote.
“Basically,” Green continued, “a trust is set up for the payout to occur over 25 years. I would assume something similar here. With that in mind, $30 Billion over 25 years would be a litigation cost of $1.2 Billion a year.” He noted that during the trailing twelve months, 3M Company generated $5.45 billion of net income. Therefore, he says that the company could cover this theoretical liability easily, with upwards of $4.1 billion of retained owner earnings left over.
Green says that owner earnings are one of the primary metrics that famed value investor, Warren Buffett, used when evaluating businesses, and with that in mind, he wrote: “Buffett discounted stabilized businesses such as these at the 10-year treasury rate. I baked in a high- and a low-end market cap based on the long and short ends of the risk-free yield curves. Blending the two gives a fair market cap of $98 billion. There are 551.672 million shares outstanding as of June 2, 2023. This gets us to a fair value of $177.64 a share based on these assumptions.”
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.
Green said that he personally owns 3M shares, writing, “I, like most, have been waiting to hear any revelations in the 3M court case. $10 billion sounds like a lot, with more to come, but at least we're getting some rational judgments.” With this news in hand, Green concluded his piece by stating that he plans to begin “buying” MMM shares again.
Overall bias of Nobias Credible Analysts and Bloggers:
Looking at credible analyst opinions on MMM shares, two out of the four credible individuals that Nobias tracks have expressed bearish outlooks for 3M shares. The credible author community is equally torn; 50% of recent reports published by these credible authors have expressed a “neutral” bias.
The most recent update that we’ve seen from a credible Wall Street analyst comes from Citi’s Andrew Kaplowitz, who is a Nobias 5-star rated analyst. According to the Fly on the Wall, “Citi analyst Andrew Kaplowitz raised the firm's price target on 3M to $126 from $117 and keeps a neutral rating on the shares. The analyst says megatrends and "still emerging fiscal tailwinds" should help moderate the potential downside for industrials in a slowing macro-economic environment. In addition, improving price versus cost trends and gradually improving supply chains should remain supportive of improving profitability for much of the group, Kaplowitz tells investors in a 2023 outlook research note.”
Overall, the average price target applied to 3M Company by credible analysts tracked by the Nobias algorithm is $129.00. After 3M’s rally on Friday, shares are trading for $102.53, meaning that the $129.00 average price target implies upside potential of approximately 25.8%.
Disclosure: Nicholas Ward has no MMM position. Nicholas Ward wrote this article for Nobias at their request with the intention 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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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.