What’s Next For 3M Stock After A 20% Rise Last Week Amid Q2 Beat?

3M (NYSE: MMM) recently reported its Q2’24 results, with revenues and earnings beating the street estimates. The company reported adjusted revenue of $6.0 billion and earnings of $1.93 on a per-share and adjusted basis, compared to the consensus estimates of $5.9 billion and $1.68, respectively. The company also raised its full-year outlook. The stock rallied over 20% after its Q2 beat. However, we think MMM stock is now fully valued at levels of around $125. In this note, we discuss 3M’s stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at 3M’s stock performance in recent years. MMM stock has seen  little change from levels of $120 in early January 2021 to around $125 now, vs. an increase of about 45% 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. 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.

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 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 face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, we believe MMM stock is appropriately priced. We estimate 3M’s Valuation to be $117 per share, slightly below its current level of around $125. Our forecast is based on a 16x P/E multiple for MMM and expected earnings of $7.21 on a per-share and adjusted basis for the full year 2024. The 16x figure aligns with the stock’s average P/E ratio over the last five years.

3M’s revenue of $6.3 billion (reported) in Q2 was down 0.5% y-o-y. Transportation and Electronics segment sales were down 2.2%, Safety & Industrial revenue was down 0.2%, and the Consumer segment saw a 2.4% decline in sales. 3M saw its adjusted EBITDA expand by 430 bps y-o-y to 26.2% in Q2. This led to a solid 39% y-o-y rise in the bottom line to $1.93 on an adjusted basis. Looking forward, 3M expects its full-year organic sales to rise as much as 2%, and its adjusted earnings per share to be in the range of $7.00 and $7.30, higher than its prior estimate of $6.80 and $7.30.

Overall, we believe that 3M posted a stellar Q2, but after its recent rally, its stock appears fully valued now, and investors willing to enter it will likely be better-off waiting for a dip.

While MMM stock looks like it is appropriately priced, 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 7/28/2024
[2] Cumulative total returns since the end of 2016

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