Bill Cara
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3M Company (MMM) Quarterly Report for Maverick Investors

October 11, 2023: $90.39

The Business:

3 M’s business operations is an innovation powerhouse, producing over 60,000 products under several world-renowned brands. The company operates under five business segments:

  1. Industrial: Serves automotive, electronics, appliances, paper, packaging, food, and construction markets with products like tapes, abrasives, adhesives, and filtration systems.
  2. Safety and Graphics: Includes PPE, commercial graphics, cleaning products, electrical solutions, roofing materials, and traffic safety systems.
  3. Health Care: Provides medical supplies, skin health products, dental items, health information systems, and drug delivery systems.
  4. Electronics and Energy: Serves electronic devices, telecommunications, electrical products, power generation, and infrastructure protection markets.
  5. Consumer: Covers home improvement, office supplies, home care, and health care products, featuring brands like Post-it, Scotch, Filtrete, Nexcare, and Command.

 Consideration for Maverick Portfolio:

3M offers a robust dividend yield (6.61%) but an extremely low 10-year total return (2.27% to 11 Oct 23), making it attractive only to income-oriented investors presently.

At other times, 3M may be appropriate for Mavericks with a risk profile score of 16-21. The Moderately Conservative Investor aims for a balanced approach that combines growth and stability. The Maverick CAUTIOUS GROWTH portfolio is designed to achieve modest medium-term total returns. 3M may also be appropriate for Mavericks with a risk profile score of 22-29. The Moderate Investor seeks to balance caution and ambition, aiming for reasonable growth while managing risk. The Maverick MODERATE GROWTH portfolio is designed to maintain a stable yet potentially rewarding financial strategy by including a mix of conservative and moderately aggressive Dow 30 stocks.

Current Maverick Guidance:

  • Short-term: Avoid
  • Long-term: Avoid

Internal Strength/Weakness:

Strengths

  1. Diverse Product Portfolio: 3M offers over 60,000 products spanning various industries, reducing reliance on any single market and economic fluctuations.
  2. Innovation Excellence: 3M is known for innovation, with a substantial share of recent revenue from new products.
  3. Strong Branding: 3M’s trusted brands like Post-it and Scotch drive customer loyalty.
  4. Global Reach: Operating in 70+ countries and selling in 200+ enables access to diverse markets.
  5. Sustainability Commitment: 3M focuses on reducing costs and enhancing reputation.
  6. Efficient Distribution Network: 3M’s extensive network ensures efficient product delivery.
  7. Skilled Workforce: Employee development enhances innovation and operational efficiency.

Weaknesses

  1. Legal & Regulatory Risks: Ongoing lawsuits and regulatory challenges pose financial and reputational risks.
  2. Supplier Dependency: Relying on various suppliers for raw materials exposes the company to supply chain disruptions.
  3. Competitive Markets: 3M faces fierce competition, affecting market share and margins.
  4. Economic Sensitivity: Economic downturns can negatively impact revenues despite diversification.
  5. Product Failures/Recalls: Any failure or recall can have significant financial and reputational consequences due to its extensive product range.
  6. Global Market Risks: International exposure exposes 3M to economic, currency, and geopolitical uncertainties.

External Opportunities/Threats:

Opportunities

  1. Emerging Market Growth: 3M can leverage rising middle classes in emerging markets like China, India, and Brazil for product expansion.
  2. Healthcare Expansion: 3M can capitalize on the global healthcare trend for advanced medical solutions.
  3. Sustainable Product Demand: 3M, with its sustainability focus, can meet the increasing demand for eco-friendly products.
  4. Tech Innovation: 3M’s R&D strength positions it for innovation in electronics, AI, and other fields.
  5. E-commerce/Digital Growth: 3M can expand its online presence in response to the growing digital marketplace.
  6. Acquisitions/Partnerships: Strategic deals can provide market access, new technologies, and expertise.
  7. Safety Equipment Demand: High demand for personal protective equipment presents growth potential.

Threats

  1. Intense Competition: 3M faces strong competition, risking market share and profitability.
  2. Regulatory/Legal Challenges: Changes in laws and past lawsuits can impact operations and reputation.
  3. Economic Uncertainty: Global economic instability can negatively affect 3M’s business.
  4. Supply Chain Disruptions: Political, natural, or trade disruptions can impact the supply chain.
  5. Currency Fluctuations: Exchange rate fluctuations can affect 3M’s financial results.
  6. Public Health Crises: Health crises like COVID-19 can disrupt 3M’s operations and supply chain.
  7. Innovation/Technology Changes: Rapid tech changes can make products obsolete, risking market share.

 General Market Guidance:

  • Technical Analysis: Investing.com = Strong Sell, TipRanks = Sell.
  • Point & Figure Pattern: Double Bottom Breakdown on 01-Aug-2023 (from StockCharts)
  • Consensus Analyst Ratings— MarketBeat = Reduce, TipRanks = Hold.
  • 14 Wall Street analysts have offered 12-month price targets for 3M in the last 3 months. There are zero Buy, 12 Hold, and 2 Sell. (from TipRanks)
  • The average price target is $112.50, with a one-year high forecast of $148.00 and a low forecast of $93.00. (from TipRanks)
  • Dividend Yield: $1.50 per share paid quarterly to yield 6.61%. (from TipRanks)

Value Line Guidance: (all from VL)

  • Company Financial Strength Rating: A
  • Share Price Safety, Market Timing, and Technical Rank:1=best. 5=worst
    • Share Price Safety: 3/5
    • Market Timing: NR
    • Technical Rank: NR
  • Stock’s Price Stability: 90/100
  • Price Growth Persistence: 35/100
  • Earnings Predictability: 25/100
  • The Safety rank has been lowered to 3 (Average) due to ongoing legal issues, which has widened the company’s long-term appreciation potential.

Revenue, Cash Flow, Earnings Quarterly Operations Review of Previous Quarters:

2Q2023 Quarterly Report

  • 3M Company reported a significant loss in the second quarter of 2023, primarily due to legal costs related to the PFAS contamination class action lawsuit. This resulted in a charge of $14.19 per share.
  • Additional losses of $0.24 per share were incurred due to other litigation expenses and special items, leading to an 11% decline in adjusted earnings compared to the previous year.
  • Revenues declined by 4% during the quarter.

1Q2023 Quarterly Report

  • 3M Company had a challenging start in the first quarter of 2023, with a 22% decrease in earnings per share and a 9% decline in sales.
  • Organic sales (excluding divestitures and foreign currency effects) slipped about 5% year-over-year.
  • Difficult market trends, inflation, lower consumer demand, rising raw materials and operating costs, and high legal expenses impacted the company’s performance during the quarter.

4Q2022 Quarterly Report

  • 3M Company faced challenges in 4Q2022, with falling demand in consumer-dependent markets in electronics and retail.
  • Declining discretionary spending and inventory destocking affected the company’s customers.
  • Dollar strength and foreign exchange impacts contributed to a year-over-year sales decline.

Operations 3-to-5-year Outlook (Revenue, Cash Flow, Earnings)

  • Revenue Growth Potential: +2.5%
  • Cash Flow Growth Potential: +3.5%
  • Earnings Growth Potential: +4.5%
  • Although 3M anticipates returning to profitability in the second half of 2023, it will likely close the year with a 3%-5% decrease in top-line revenues.
  • The company expects improvements in 2024, with revenues rebounding by 3%-5%, but results may lag behind 2022.
  • Plans are underway to spin off the healthcare unit, which accounted for approximately 25% of the company’s revenues in the previous year.
  • 3M is focused on cost-cutting, simplifying its business, and enhancing supply-chain management to drive efficiencies, improve customer service, and boost profits over the long term.

Financial Performance

  • 10-year Average Annual Total Return: +2.27% (Dow 30 4th quartile).
  • https://www.averageannualreturn.com/mmm/?l=1
  • 10-year EPS Growth Rate: N/A (https://www.ruleoneinvesting.com/eps-calculator/)
  • EPS 2022: $10.18  2023:  e($3.00)     2024: e$9.00    (from Value Line Quarterly Report)
  • Average Annual PE: 14x (VL Quarterly Report)
  • PEG Ratio: NA (FinViz)
  • Dividend Growth Potential: +2.0% (VL)
  • Beta: 0.98 FinViz

Strategic Developments

  • The pending spinoff of the healthcare unit is in progress and expected to close in late 2023 or early 2024, subject to necessary conditions and approvals.
  • The company plans to wind down its PFAS ‘forever chemicals’ production before 2026, but potential legal fees, damages, and cleanup efforts remain a major concern until they can be settled and quantified.
  • Other restructuring efforts are aimed at improving the company’s long-term performance.

Conclusion

  • There are too many internal company weaknesses and external threats to the 3M Company to warrant our current interest.
  • Over the long run, MMM is a candidate for the Maverick CAUTIOUS GROWTH and MODERATE GROWTH portfolio.

10-Year Historical Price Chart:

https://tvc-invdn-com.investing.com/data/tvc_9f9e91cad5f69b9f1f89d5f7f1601960.png

Point & Figure Chart: (from StockCharts.com)

https://stockcharts.com/freecharts/pnf.php?c=MMM,PWTAMANRNO[PA][D][F1!3!!!2!20]