What’s Happening With 3M Stock?

3M stock (NYSE: MMM) currently trades around $128 per share, roughly 15% below its pre-inflation shock highs of $150 seen in June 2021. This performance aligns with that of its peer – Honeywell stock (NYSE:HON) – also down 15% over this period. 3M’s sales growth has been tepid in recent years 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.

3M saw its stock trading at around $97 in June 2022 just before the Fed started increasing rates, and has recovered 32% from that level. This compares with 45% gains for the S&P 500 index over this period. Much of the rebound in 3M stock was seen from February this year, after the company took several initiatives to improve profitability, including the divestiture of Solventum and the resolution of its major litigations.

Notably, MMM stock has performed worse than the broader market since 2021. Returns for the stock were 5% in 2021, -30% in 2022, and -3% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it 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 around rate cuts and multiple wars, 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 strong jump? Returning to the pre-inflation shock level of $150 implies that MMM stock will have to gain around 17% from here, and we don’t think it will materialize anytime soon.  We estimate 3M’s Valuation to be $117 per share, slightly below its current level of around $128. 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.

Our detailed analysis of 3M’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen since 2022. It compares these trends to the stock’s performance during the 2008 recession.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P 500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024

In contrast, here’s how MMM stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

3M and S&P 500 Performance During 2007-08 Crisis

MMM stock declined from an adjusted price of $47 in September 2007 (pre-crisis peak) to around $23 in March 2009 (as the markets bottomed out), implying MMM stock lost 50% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $44 in early 2010, rising 86% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

3M Fundamentals Over Recent Years

3M revenues declined from $35.4 billion in 2021 to $32.6 billion now. The decline in sales can partly be attributed to lower demand for respirators and other personal protective equipment. A weak consumer sentiment, forex headwinds, lower automotive aftermarket demand also weighed on the overall sales growth. The company’s operating margin also contracted from 21.7% in 2021 to 3.2% for the last twelve-month period. 3M’s reported earnings plunged from $10.12 in 2021 to $1.70 now.

Does 3M Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

3M’s total debt decreased from $18 billion in 2021 to $14 billion now, while its total cash increased from around $5 billion to $10 billion over the same period. The company garnered $6 billion in cash flows from operations in the last twelve months. Given its solid cash cushion, 3M appears to be in an excellent position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe 3M (MMM) stock has the potential for some gains once fears of a potential recession are allayed. That said, an uncertain macroeconomic environment, weak consumer sentiment, and profitability headwinds remain the key risk factors to realizing these gains. We think investors willing to pick 3M will be better off waiting for a dip.

While MMM stock looks like it is fully 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 9/8/2024
[2] Cumulative total returns since the end of 2016

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