Source: PaxForex Premium Analytics Portal, Fundamental Insight
3M has encountered several challenges in recent years, including numerous legal battles and a history of mediocre growth and declining margins. This performance has made it a less appealing option for high-quality stock picks.
However, investment decisions should focus more on a company's potential rather than its past performance. From this perspective, there is a compelling case for considering 3M stock now. Yet, this opportunity may not be suitable for all investors. Here’s what you need to know to determine if it fits your investment strategy.
First, let's clarify what 3M is not. It’s a value stock, but not a deep-value stock. This means it’s not the high-risk/high-reward investment that many aggressive investors seek. Nor is it a high-quality company with a strong moat that you can buy and hold for a decade. Additionally, it’s not a growth stock with rapidly increasing revenue.
Fortunately, 3M has managed to resolve many of its legal issues, including settlements for the combat arms earplugs and PFAS problems.
Currently, 3M appears undervalued, with several potential catalysts that could lead to a valuation expansion and solid returns for shareholders. If you’re an investor looking for value stocks with the potential for 15% returns, 3M might be for you. Here are some of the possible catalysts.
Former L3Harris CEO William Brown assumed the role of 3M’s CEO on May 1. His appointment as an external hire indicates the board’s willingness to implement changes at the underperforming conglomerate. One person can indeed make a significant impact, as seen with Larry Culp at GE or Scott Santi at Illinois Tool Works.
Brown’s appointment has already sparked optimism among some analysts, including the well-regarded Nigel Coe of Wolfe Research. Coe highlights Brown’s reputation for improving margins and efficiency, which are precisely the areas where 3M needs improvement right now.
3M cut its dividend this year, which, despite initial concerns, turned out to be beneficial. The company still offers a solid dividend yield of 2.8%. This reduction has freed up cash for the new CEO, William Brown, to invest in growth initiatives or restructuring efforts.
Wall Street projects that 3M will generate $3.6 billion in free cash flow (FCF) annually over the next three years. This equates to approximately $6.40 per share, comfortably covering the current $2.80 per share in dividends, while still leaving a substantial amount of FCF for strategic investments.
A potentially controversial view is that 3M’s former healthcare unit, Solventum, was a struggling business. Management spent significant time and resources on multibillion-dollar acquisitions and disposals to restructure it for growth, with limited success. The April spinoff of Solventum, which included a $7.7 billion cash payment to 3M, is seen as a positive move.
Brown brings fresh ideas to 3M, complementing an already substantial restructuring program. This plan involves significant job cuts, streamlining corporate centers and management layers, simplifying the supply chain, and adjusting the marketing model in less critical markets. Additionally, 3M is reducing its consumer portfolio by 5% to eliminate less profitable products.
The restructuring efforts appear to be yielding results. Management expects the adjusted operating margin for continuing operations to increase from around 18.7% in 2023 to between 20.7% and 21.45% in 2024.
Improvements in 3M’s end markets will further support Brown’s efforts. Management anticipates organic sales growth in 2024 for two of its three segments -- safety & industrial, and transportation & electronics. The consumer segment, however, is expected to see a decline due to weakness in consumer discretionary spending.
Overall, 3M is poised for organic sales growth in 2024, with the potential for continued recovery in 2025, especially if interest rates decrease. These positive catalysts could lead to a more optimistic market view of 3M’s valuation. With a forecasted $3.6 billion in annual FCF, 3M is trading at about 15.6 times its 2024 FCF, suggesting some upside potential.
In summary, 3M appears undervalued. If these catalysts lead to improved earnings momentum, the stock could appreciate, making it suitable for value investors looking for companies with potential for positive news and better execution.
As long as the price is above 97.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 103.10
- Take Profit 1: 106.00
- Take Profit 2: 109.00
Alternative scenario:
If the level of 97.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 97.00
- Take Profit 1: 92.00
- Take Profit 2: 89.00
