HON - Is 3M Company Stock A Buy Amid Legal Headaches

2023-10-23 01:41:34 ET

Summary

• 3M Company is one of the largest manufacturing companies in the world, headquartered in St. Paul.
• On October 24, 3M will publish its financial report for the third quarter of 2023.
• Simultaneously, 2023 is a transition year when the company's management had to use maximum efforts to reach agreements to resolve ongoing litigation that has been going on for many years.
• Furthermore, the company's Non-GAAP P/E [TTM] is 9.73x, 40.74% lower than the sector average and 41.85% lower than the average over the past five years.
• We initiate our coverage of 3M with an "outperform" rating for the next 12 months.

3M Company (NYSE: MMM ) is one of the largest manufacturing companies in the world, headquartered in St. Paul. The company operates through four business segments: Transportation and Electronics, Consumer, Security and Industrial, and Health Care.

3M is known worldwide for its extensive portfolio of innovative products, which include, but are not limited to, skin care products, electrical products, building materials, respiratory protection products, structural adhesives, and tapes used in various industries, including aviation.

Simultaneously, 2023 is a transition year when the company's management had to use maximum efforts to reach agreements to resolve ongoing litigation that has been going on for many years. So, on June 22, 2023 , 3M reached a $10.3 billion settlement with various U.S. public water systems to resolve thousands of lawsuits over water contamination with per- and polyfluoroalkyl substances (PFAS). However, this amount will be paid over 13 years, and given the company's year-on-year revenue growth, we do not expect it to jeopardize its financial position.

Additionally, on August 29, 2023 , the company reached an agreement to pay $6 billion between 2023 and 2029 to settle lawsuits by U.S. service members and veterans claiming they suffered hearing loss due to the use of 3M earplugs.

On the other hand, despite rising geopolitical tensions in the Middle East, which could potentially lead to significant increases in hydrocarbon prices, 3M is considered a defensive stock due to its stable cash flow even during periods of rising inflation.

However, despite the problems associated with growing inflation in the world, including due to rising hydrocarbon prices, 3M Company's gross margin has continued to increase over the past few quarters. As a result, the company's top five shareholders , including well-known financial organizations such as Vanguard Group, State Street, Charles Schwab Investment Management, Geode Capital Management, and Blackrock, have a combined stake of 26.56% at the end of June 2023.

The second quarter of 2023 showed excellent results, as 3M's revenue and EPS exceeded analysts' expectations significantly, and its margins continued to grow year-on-year and quarter-on-quarter despite rising inflation in the United States in recent months.

On October 24 , 3M will publish its financial report for the third quarter of 2023. According to Seeking Alpha , 3M's revenue for the third quarter of 2023 is expected to be $7.94-$8.37 billion, down 7.2% year-over-year and up 2.1% from analysts' expectations for the previous quarter. At the same time, per our model, the company's total revenue will be within this range and amount to $8.12 billion.

3M's year-on-year decline in revenue will be due to the strengthening of the US dollar against other major currencies and a decrease in demand for the company's products in Canada, Japan, and China due to raised household debt, which, among other things, leads to a decrease in consumer spending.

On the other hand, 3M's operating income margin in Q2 2023 was about 20.5%, an increase of 4.72% relative to Q2 2022, but more importantly, it is significantly higher relative to the industrial goods sector.

At the same time, we predict that 3M's operating profit margin will reach 18.5% by 2023. On the other hand, in 2024, this financial metric will increase to 19.1%, thanks to lower prices for raw materials and electricity needed to produce the company's products, an increase in total sales year-on-year, higher consumer spending as central banks lower interest rates and a weakening US dollar relative to other foreign currencies.

According to Seeking Alpha , 3M's Q3 EPS is expected to be $2.25-$2.39, up 33.5% from the Q2 2023 consensus estimate. At the same time, according to our model, 3M's EPS will be above this range and amount to $2.41.

Furthermore, the company's Non-GAAP P/E [TTM] is 9.73x, 40.74% lower than the sector average and 41.85% lower than the average over the past five years. Nonetheless, 3M's Non-GAAP P/E [FWD] is 9.99x, which is one of the factors indicating its significant undervaluation by financial market participants during the new war in the Middle East.

Even as 3M continues to settle numerous lawsuits brought against it by tens of thousands of people, the company's debt continues to decline yearly. At the end of the second quarter of 2023, 3M's total debt was about $16.9 billion, down 7.7% from 2021. Moreover, in recent quarters, there has been an increase in the company's EBITDA, which is reflected in the stabilization of its total debt/EBITDA ratio of about 2.25x.

Conclusion

3M Company is one of the largest manufacturing companies in the world, headquartered in St. Paul. Moreover, the company is known worldwide for its extensive portfolio of innovative products, which include, but are not limited to, skin care products, electrical products, building materials, respiratory protection products, structural adhesives, and tapes used in various industries, including aviation.

Simultaneously, 2023 is a transition year when the company's management had to use maximum efforts to reach agreements to resolve ongoing litigation that has been going on for many years. As a result, the company's share price has declined by more than 39% since the start of 2023, underperforming key competitors in the industrial sector such as Caterpillar ( CAT ) and Honeywell International ( HON ).

Meanwhile, for 64 years, 3M has maintained a policy of increasing dividend payments year after year, which is one of the crucial investment theses that helps attract the interest of long-term investors.

We initiate our coverage of 3M with an "outperform" rating for the next 12 months.

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