3M Faces Challenges Despite Recent Stabilization Efforts
3M (NYSE: MMM) has faced significant challenges in recent years, causing its stock performance to languish compared to market peers. Once hailed as a stable blue-chip stock, 3M has grappled with issues such as lackluster sales, safety recalls, and a barrage of lawsuits tied to its production and disposal of harmful chemicals. In a noteworthy shift, the company cut its dividend in 2024, ending its streak as a Dividend King, and spun off its healthcare division, now known as Solventum (NYSE: SOLV).
Over the last five years, 3M’s stock has only increased by about 20%, while the S&P 500 surged approximately 90%. Even when considering total returns, which include dividends, the index has significantly outperformed 3M.
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Image source: 3M.
Despite these hurdles, 3M’s business has shown signs of stabilization in the past year. Given this context, should investors consider 3M’s stock as a viable value investment moving forward?
Reasons Behind 3M’s Market Underperformance
3M offers over 60,000 products across various segments, including industrial applications, worker safety, and consumer goods. Its range features adhesives, abrasives, laminates, personal protection gear, and recognized consumer brands like Scotch Tape, Scotchguard, and Post-It Notes.
|
Metric |
2021 |
2022 |
2023 |
2024 |
|---|---|---|---|---|
|
Organic sales growth |
8.8% |
1.2% |
(3.2%) |
1.2% |
|
Operating margin |
20.8% |
19.1% |
(43.4%) |
19.6% |
Data source: 3M.
The company’s sales saw a spike in 2021 due to recovery from pandemic downturns. However, a slowdown occurred in 2022 and 2023, primarily driven by inflation, rising interest rates, and geopolitical tensions. The most affected segments were safety and industrial, transportation and electronics, while its healthcare division (now Solventum) fared better.
Additionally, rising legal costs weighed heavily on 3M’s margins. The company faces a $6 billion settlement for defective combat earplugs from 2023 to 2029 and an agreement to pay $14 billion to remediate U.S. drinking water contaminated by PFAS (perfluoroalkyl and polyfluoroalkyl substances). These “forever chemicals” take substantial time to decompose and have been linked to health issues. Notably, insurance giant AIG (NYSE: AIG) is suing 3M over liability coverage, complicating matters further.
In 2024, the tide began to turn for 3M as organic sales grew again and operating margins improved, aided by easing inflation and a recovering macro environment. The company successfully reduced its net debt from $10.2 billion at the end of 2023 to $5.3 billion by the end of 2024, indicating improved financial stability against its settlement obligations.
Future Outlook for 3M
3M’s new CEO, Bill Brown, who assumed leadership in May, aims to innovate by focusing on faster-growing markets. He intends to boost the company’s R&D, enhance supply chain visibility, and accelerate product launches to prevent future safety recalls and legal disputes. In 2024, 3M launched 169 products, a 32% increase over the previous year, with expectations of another double-digit boost in new launches for 2025.
For 2025, 3M anticipates organic sales growth between 2% and 3%. Its adjusted EPS (factoring in the Solventum spin-off but excluding litigation fees) is projected to rise by 4% to 8%. During the fourth quarter call, Brown emphasized a focus on more efficient product development to generate heightened sales and margins.
Should Investors Buy 3M’s Stock Now?
3M’s initiatives demonstrate positive momentum, and its stock appears reasonably valued at 19 times its adjusted EPS forecast for 2025. The company offers a dividend yield of about 2% at current share prices and plans on continuing share buybacks.
Nonetheless, 3M may not be sufficiently valued to be deemed a true bargain, especially with the 10-year Treasury yield sitting at 4.4%. Additionally, the company is still managing substantial settlement liabilities, and the success of its turnaround strategies could take time to materialize. Balancing the speed of new product introductions with necessary improvements in quality and safety adds further complexity.
Given these factors, it may be prudent to hold off on investing in 3M until clearer signs of progress emerge. There are numerous better-managed companies available that trade at lower valuations and offer higher dividends. Investors may find superior opportunities elsewhere.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends 3M. The Motley Fool recommends Solventum. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
