Source: PaxForex Premium Analytics Portal, Fundamental Insight
Being a constituent of the Dow Jones Industrial Average and boasting a long history of dividend increases, 3M garners significant attention from a diverse range of investors. Despite its popularity, there is no consensus on its future trajectory.
While some investors remain optimistic about 3M's prospects, others approach it with caution. To offer deeper insights into the company's potential upsides and downsides, two contributors from fool.com have analyzed both the bear and bull cases for 3M's stock.
Even when disregarding its potential legal liabilities, 3M has faced operational challenges in recent years. Its profit margins have declined, and the company has developed a track record of missing its guidance, particularly concerning sales projections.
The latter issue is far from insignificant. Management structures its operations and cost base based on projected sales volumes. However, when a company consistently misses its sales guidance, it can lead to margin erosion and the need for restructuring. Unfortunately, 3M has experienced both of these challenges in recent years and is now undergoing another significant restructuring.
Although this restructuring effort should provide some assistance, during the recent earnings call, 3M's management cautioned investors to expect full-year organic revenue growth to be "at the lower end of our guide that we had given, which was flat to minus 3% coming into the year," according to Chief Financial Officer Monish Patolawala.
Consequently, 3M's sales guidance is once again facing pressure, and there is a possibility that it may not meet its initial full-year guidance. The recent results indicate a step in the right direction, but it can be considered a small step. Many uncertainties remain about the company's ability to deliver value to its shareholders.
The skepticism displayed by bears towards 3M is certainly reasonable, but it might be slightly exaggerated. While it is true that the company has faced challenges with a shrinking gross profit margin in recent times, it is crucial to consider the bigger picture.
3M's restructuring initiatives have shown success, resulting in an expansion of its net profit margin. This positive development becomes evident when examining the five-year average profit margin. Taking the long view provides a more balanced perspective on the company's overall performance.
There is another positive indication in 3M's performance, which lies in its improved inventory management. This success has contributed to a strong cash flow outlook for 2023. In 2022, the company reported an adjusted free-cash-flow conversion rate of 82%, calculated as adjusted free cash flow divided by net income attributable to 3M (adjusted for special items). Looking ahead, management projects an even better adjusted free-cash-flow conversion rate of 90% to 100% for 2023.
Shifting focus from the financials to the stock's valuation, investors will find an enticing opportunity due to the recent sell-off, leaving 3M shares in the bargain bin. Currently, the shares trade at 9.6 times the operating cash flow, representing a discount compared to their five-year average cash-flow multiple of 13.6. Even when considering the price-to-forward-earnings ratio, the stock remains attractively valued at 11.6 times future earnings.
Adding to the positive outlook, 3M has a remarkable track record of raising its dividend for 65 consecutive years. This achievement is uncommon among other stocks and showcases the company's resilience in overcoming challenges throughout its history, suggesting it has the capacity to navigate current headwinds as well.
Certainly, the current situation presents undeniable concerns with the 3M stock. Conservative investors may find it prudent to wait on the sidelines and observe how the company progresses with its ongoing restructuring plan before making any investment decisions. This cautious approach allows them to assess the impact of the changes on the company's performance and stability.
On the contrary, for investors who are more open to accepting risk, 3M holds appeal, particularly for value and income investors. Despite the challenges, the stock's discounted valuation and attractive dividend history offer an opportunity for potential long-term growth and consistent income. Such investors might see the current circumstances as a chance to enter the market at an advantageous position, considering the company's historical resilience and commitment to its dividend track record. However, it is essential for these risk-tolerant investors to conduct thorough research and assess their own investment goals before making any decisions.
As long as the price is above 102.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 105.00
- Take Profit 1: 107.50
- Take Profit 2: 109.00
Alternative scenario:
If the 102.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 102.00
- Take Profit 1: 100.00
- Take Profit 2: 98.00
