MMM - 3M Might Be A Value Trap: Litigation Costs May Kill Free Cash Flow Growth

2024-06-05 16:06:24 ET

Summary

• 3M's substantial litigation costs will negatively impact free cash flow, making it a potential value trap.
• Growth has been nonexistent in recent years and no clear catalysts for growth are visible.
• 3M may be overvalued, but is considered a hold by the author.

Investment Thesis

3M Company's ( MMM ) financial growth has deteriorated in recent years and free cash flow generation is at risk due to $18.5 billion in legal settlements damages. I don’t see any reason to believe that the company can return to sustainable growth and believe it might be a value trap. I consider the stock to be a hold, as it may not be terribly overvalued, and I cannot rule out that a turnaround won’t happen.

3M’s Financial Picture

3M’s financials have deteriorated since 2014, with revenue only experiencing notable growth during the pandemic, which arguably was a beneficial time for the company. Gross profit and operating income have declined, and net income actually turned negative during 2023 due to its legal woes, as the company posted a full year GAAP net loss of $12.63 per share, driven by the accrual of $20.39 per share impact of litigation costs related to its Combat Arms Earplug ((CAE)) and Public Water Systems ((PWS)) settlements, as well as $1.48 per share in other special costs....

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