Source: PaxForex Premium Analytics Portal, Fundamental Insight
Industrial giant 3M has undergone significant shifts recently, including the spin-off of its healthcare division and a steep 50% dividend cut. For years, the company’s stock had fallen out of favor with Wall Street, but after a strong second-quarter earnings report, the shares surged by 25%. So, is 3M stock a buy, sell, or hold right now?
3M has been grappling with legal and regulatory challenges for years. The most prominent issues involve product liability related to earplugs sold to the military and environmental concerns over "forever chemicals." These are no small problems, with billions of dollars at stake. However, 3M has been actively addressing these challenges. The company took a major step in the second quarter of 2023, recording a one-time charge of $14.43 per share to cover the costs of resolving these issues, which pushed earnings into negative territory.
From a long-term perspective, finding a way to fund these costs without overloading the balance sheet with debt was crucial. The solution? Spinning off the healthcare business, which led to the creation of Solventum. This move freed up the necessary cash to cover legal expenses. However, the downside is that the healthcare division was expected to be a key growth driver for 3M.
Despite these challenges, 3M is making progress. The company is working through its legal issues and has found a way to finance the costs. Management also appears more optimistic about the future, adjusting its full-year 2024 earnings guidance to a higher range of $7.00 to $7.30 per share, up from the earlier $6.80 to $7.30. This raises the midpoint of its guidance.
While 3M's stock has rallied following its earnings report, the shares are still far below their previous highs and lag behind the broader industrial sector, represented by the Industrial Select Sector SPDR ETF. If you're interested in turnaround stories, 3M might still have room to recover. However, any gains from here are likely to be slower and less dramatic than the initial post-earnings surge.
If you've been holding onto 3M for a while, now may not be the time to sell. The company's outlook is improving, and it could be a mistake to exit just as the business starts to turn a corner. That said, if you bought the stock near its lows hoping for a quick rally, it might make sense to lock in some profits after the recent 25% price jump.
There are still reasons to be cautious with 3M, though. The improved earnings guidance largely reflects a less pessimistic outlook, rather than a more optimistic one. The midpoint of the guidance range increased because the lower end was raised - not because the high end improved. And while legal expenses have decreased, 3M is not entirely out of the woods yet.
Long-term investors should also consider the impact of the healthcare spin-off. By divesting this key growth driver, 3M has altered its growth potential. While what's left of the company is still solid, it doesn't have the same prospects it once did. Slow and steady growth from an industrial icon isn't bad, but with a 2.1% dividend yield, income investors might not find it attractive. And with reduced growth potential, it may not appeal to growth investors either. Essentially, 3M's main allure now lies in its turnaround story, which only the most aggressive investors may want to pursue.
In summary, 3M isn’t a bad company, but it's still dealing with significant changes driven by legal and regulatory challenges. Most investors might want to proceed with caution and explore other options, even though 3M is starting to show signs of recovery. The recent post-earnings price spike likely already reflects much of the good news.
As long as the price is above 130.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 134.62
- Take Profit 1: 140.00
- Take Profit 2: 145.00
Alternative scenario:
If the level of 130.00 is broken-down , follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 130.00
- Take Profit 1: 125.00
- Take Profit 2: 120.00
