Source: PaxForex Premium Analytics Portal, Fundamental Insight
In December, shares of industrial conglomerate 3M experienced a modest increase of just over 10%, as reported by S&P Global Market Intelligence. This upward trend is attributed to the market's optimistic outlook for improved growth in 2024, fueled by expectations of interest rate cuts during the same period.
While the Federal Reserve's decision to roll back interest rate hikes in the upcoming year is uncertain, the market has enthusiastically assumed this scenario, evident in the decline of 10-year Treasury yields from nearly 5% in late October to slightly below 4% at present.
This positive economic outlook is particularly advantageous for 3M shareholders for several reasons. Firstly, the company has substantial exposure to interest rate-sensitive sectors such as consumer electronics, automotive, construction, and home improvement goods. Additionally, its portfolio of adhesives, abrasives, advanced materials, and electronics materials plays a crucial role across various industrial sectors dependent on economic growth.
Secondly, 3M is in the process of spinning off its healthcare segment, Solventum, scheduled for the first half of 2024. Following the spin-off, 3M will retain a 19.9% stake in Solventum, providing potential for future cash generation. This strategic move will eliminate a stable yet less economically sensitive source of earnings and cash flow, resulting in a more cyclical profile for the remaining 3M company compared to its current structure.
The company undoubtedly presents an appealing prospect as a turnaround play, particularly with ongoing efforts by the management to implement cost-cutting measures and reposition the company for growth. Recent improvements in margin performance, driven by strategic restructuring activities, indicate a positive trajectory.
However, certain uncertainties linger around the stock. One notable concern is the management's historical track record, which falls short of meeting sales guidance, let alone surpassing it. Additionally, investing in a high-yielding stock like 3M, currently offering a yield of 5.6%, demands careful scrutiny of the dividend's sustainability.
Examining the financials, the trailing-12-month dividend payout stands at $3.3 billion, while Wall Street analysts project free cash flow of $4.5 billion in 2023, $4.3 billion in 2024, and $4.7 billion in 2025. Although these figures, encompassing the healthcare segment, suggest the dividend's sustainability, it's crucial to note that 3M plans to spin off the healthcare segment in 2024. Additionally, the company faces significant cash outflows from legal settlements related to its use of PFAS chemicals and combat arms earplugs.
While management may aim to avoid dividend cuts and has the potential support of the 19.9% stake in Solventum, the 3M board's perspective on these matters remains uncertain. Consequently, adopting a cautious approach and awaiting 3M's outlook for 2024, coupled with insights into its capital allocation policy, would be prudent before considering an investment in the stock.
As long as the price is above 105.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 107.92
- Take Profit 1: 110.00
- Take Profit 2: 113.00
Alternative scenario:
If the level of 105.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 105.00
- Take Profit 1: 101.00
- Take Profit 2: 98.00
