With 10% Gains This Year 3M Stock Appears To Be A Better Pick Over Philip Morris

Given its better prospects, we believe 3M stock (NYSE: MMM) is a better pick than Philip Morris stock (NYSE: PM). Although these companies are from different sectors, we compare them because of their similar revenue base of around $30-35 billion. Investors have assigned a higher valuation multiple of 4.4x for Philip Morris stock versus 1.7x for 3M due to its superior revenue growth, profitability, and financial position. In the sections below, we discuss why we believe that 3M will offer better returns than Philip Morris in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in the sections below.

1. Philip Morris Stock Has Fared Better Lately

MMM stock has seen a decline of 15% from levels of $120 in early January 2021 to around $100 now, vs. an increase of about 20% from levels of $85 to around $100 over the same period for PM stock. This compares with an increase of about 40% for the S&P 500 over this roughly three-year period.

Notably, MMM stock has underperformed the broader market in each of the last three years. Returns for the stock were 5% in 2021, -29% in 2022, and -2% in 2023. Similarly, the increase in PM stock has been far from consistent, with returns of 15% in 2021, 7% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that MMM underperformed the S&P in 2021, 2022,  and 2023 and PM underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and UNP, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MMM and PM stocks see higher levels? While we think both stocks will see higher levels, MMM may fare better between the two.

2. Philip Morris’ Revenue Growth Is Better 

Philip Morris’ average annual revenue growth of 7.1% over the last three years has been much better than just 1% for 3M.  Philip Morris’ revenue rose from $28.7 billion in 2020 to $35.2 billion in 2023, while 3M saw its top line expand marginally from $32.2 billion to $32.7 billion over the same period.

3M did see a spike in sales in 2021, owing to a very high demand for masks and personal protective equipment due to the spread of Covid-19. However, its sales declined around 8% between 2021 and 2023 post pandemic. 3M’s other businesses also took a hit due to supply chain disruptions, high inflation, a strengthening dollar, and slowing economic growth. 3M’s consumer business has also been facing headwinds lately, amid lower automotive aftermarket, home improvement, auto-care, and packaging sales.

Furthermore, 3M is also facing litigations alleging that its earplugs caused hearing damage for more than 200,000 veterans and its use of per-and polyfluoroalkyl substances (PFAS) contaminated soil and drinking water, leading to health problems in some communities. However, 3M has been focused on resolving these issues. It will pay a total amount of up to $6 billion between 2023 and 2029 to resolve the earplugs’ litigation, and $10 billion payable over 13 years to resolve the “forever chemicals” litigation.

Looking at Philip Morris, it sells its tobacco products in the non-U.S. markets. Revenue is generated from the sale of cigarettes and its flagship smokeless tobacco offering – IQOS. In late 2022, Philip Morris acquired over a 90% stake in Swedish Match AB in a $16 billion deal, which has strengthened its position in smokeless products. IQOS has been growing strongly and leading the growth for Philip Morris. In fact, it has surpassed the Marlboro brand in terms of revenue.

Our 3M Revenue Comparison and Philip Morris Revenue Comparison dashboards provide more insight into the companies’ sales. Looking forward, Philip Morris’ revenue growth is expected to be in mid-single-digits average rate over the next three years, driven by its IQOS and smokeless products. 3M has spun-off its healthcare business last month. This business accounted for a quarter of the company’s total sales. As such, the adjusted sales figure for 2024 is expected to be around $24 billion and growing at a low single-digit annual rate from there for the next three years.

3. Philip Morris Is More Profitable And Offers Lower Financial Risk

3M’s reported operating margin stood at -27.6% in 2023, compared to 21.5% in 2020, while that for Philip Morris declined from 40.3% to 34.6% over the same period. Note that 3M’s reported operating margin was significantly impacted due to the settlement of litigation discussed above. The company took a pre-tax charge of $10.3 billion (recorded in Q2’23) related to its proposed settlement agreement regarding PFAS litigation, and the settlement for Combat Arms in Q3’23 resulted in a pre-tax charge of $4.2 billion. On an adjusted basis, its operating margins stood at 20.3% in 2023.

Looking at financial risk, 3M fares better. Its 30% debt as a percentage of equity is marginally lower than 31% for Philip Morris. Also, its 12% cash as a percentage of assets is higher than 5% for Philip Morris, implying that 3M has a better debt position and more cash cushion.

4. The Net of It All

We see that Philip Morris has seen better revenue growth and is more profitable. On the other hand, 3M has a better financial position. Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe 3M is the better choice of the two.

Let us compare the valuation multiples for both stocks against their historical average. 3M’s stock currently trades at 1.7x trailing revenues, vs. the last three-year average of 2.2x. In contrast, Philip Morris is trading at 4.4x revenues, lower than its last three-year average of 4.6x. This implies that 3M has a better growth potential if the valuation multiples were to return to their historical averages.

Moreover, 3M has taken several initiatives to improve profitability, including the divestiture of Solventum and the resolution of its major litigations. Although there are near-term risks, including challenging macroeconomic factors, falling sales, and a weak consumer demand environment, that could adversely impact the company’s earnings growth, we think these factors are already priced in.

While 3M stock may outperform Philip Morris in the next three years, it is helpful to see how 3M’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 5/28/2024
[2] Cumulative total returns since the end of 2016

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