Source: PaxForex Premium Analytics Portal, Fundamental Insight
To say that 3M stock has been disappointing lately is a gross understatement. The company's stock has been frankly an underdog for too long, now down more than 50 percent from its peak in early 2018. Almost all areas of its business seem to be struggling these days.
However, many of these problems are finally easing as we approach 2023. This shift could easily lead to a long-awaited upturn in the company as well as its stock. Here's a closer look at a few of the major factors now working in 3M's favor as we prepare to face the new year.
Investors who follow 3M may recall that in late October the company lowered its revenue and earnings forecasts for the full year. For example, its previous 2022 sales growth forecast of 1.5% to 3.5% was lowered to a range of 1.5% to 2%, and earnings per share for 2022 will be $10.10 to $10.35 versus a previous forecast of $10.30 to $10.80. Free cash flow margins will also be below initial expectations.
While there are many factors behind the lower forecast, the company pointed to the continued appreciation of the U.S. dollar, which makes it difficult to sell to foreign buyers. The dollar had risen more than 20 percent since midyear by October -- a huge increase by currency standards -- and hit a multi-year high in the same month.
The thing is, this is not exactly a new problem. The U.S. dollar index has been rising since 2011, a major and constant stumbling block for the company all that time. That's what can happen when about half of your income is generated overseas.
But now the skyrocketing value of the dollar is coming down significantly.
Thanks to lower domestic inflation and a long-awaited economic recovery in most of the world, the U.S. dollar is now 9 percent below the peak it reached in late September. It looks like it is still heading downward as inflation in the U.S. should level off and most other countries should continue to pick up the pace of economic growth.
At the very least, this means that the long rally in the U.S. dollar may level off, which means that 3M can now get an idea of the price and demand dynamics overseas.
In addition to currency problems, legal issues have been a major impediment to 3M stock for some time now.
The biggest of these problems is the class action lawsuit filed by former earplug users. More than 200,000 veterans have sued the 3M subsidiary that makes them, claiming that its products failed to prevent the noise-induced hearing loss it was supposed to prevent. This case could cost the company billions of dollars.
But it may not.
Although this is a controversial legal maneuver, the U.S. Chamber of Commerce as well as the American Litigation Reform Association now publicly agree with 3M's legal argument that declaring bankruptcy of a subsidiary should shield the parent company from the weight of this legal liability. This issue has yet to be resolved in the appellate court, but things seem to be changing in 3M's favor. The class action participants may end up opting for a much smaller settlement now that their original claim is in jeopardy.
In the meantime, the company has announced that it will stop producing fluoropolymers, fluorinated fluids, and PFAS-based additives - so-called "everlasting chemicals" that are not only potentially harmful but can remain molecularly unchanged for decades.
There are no lawsuits involving 3M's PFAS (at least not yet), and the company won't stop producing them until 2025. Still, to the extent that the court of public opinion affects what happens in the actual courtroom, the company seems to be making an effort to be a good citizen of the world. Consumers and corporations alike have already made it clear that these are the organizations they prefer to buy from.
Finally, credit must be given. Despite a lot of distracting and costly problems in recent years, 3M has continued to pay its dividends. Indeed, the company has not only paid a dividend every quarter for decades but has raised its annual dividend every year for the past 64 years. That makes it the king of dividends and one of the best dividend-paying companies on the market.
However, its dividend reputation is not the main reason an income-oriented investor might consider getting into this particular stock here and now. Even more compelling is that the stock's prolonged weakness has raised the current dividend yield to an attractive 4.8%. You can find higher-yielding, cheaper stocks, but you won't find a higher yield without more risk than 3M currently does. In addition, the stock is cheaply valued - just 11.6 times next year's projected earnings per share of $10.42.
This above-average to below-average dividend valuation has implications beyond immediate earnings. Thanks to rising interest rates, don't be surprised that stocks of expensive companies like 3M will begin to outperform growth stocks that rely heavily on cheap capital.
In other words, 3M stock may soon catch a strong cyclical momentum not seen in years as investors change their style preferences.
As long as the price is above 119.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 120.12
- Take Profit 1: 123.50
- Take Profit 2: 129.00
Alternative scenario:
If the level of 119.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 119.00
- Take Profit 1: 116.00
- Take Profit 2: 111.00
