3M (NYSE: MMM) recently reported its Q1’24 results, with revenues and earnings beating the street estimates. The company reported revenue of $7.72 billion and earnings of $2.39 on a per-share and adjusted basis, compared to the consensus estimates of $7.63 billion and $2.10, respectively. The company has decided to cut its dividend, after raising it for 64 consecutive years. Despite a Q1 beat, we think MMM stock is fully valued at levels of around $95. 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 faced a notable decline of 20% from levels of $120 in early January 2021 to around $95 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. Notably, MMM stock has underperformed the broader market in each of the last 3 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 GE, CAT, and UNP, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality 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 $93 per share, close to its current level of around $97. Our forecast is based on a 12x P/E multiple for MMM and expected earnings of $7.51 on a per-share and adjusted basis for the full year 2024. We have assigned a slightly lower valuation multiple, compared to the 15x average seen over the last three years for 3M, primarily due to falling sales and profitability in recent years.
3M’s revenue of $8.0 billion (reported) in Q1 was down 0.3% y-o-y. While Transportation and Electronics segment sales were up 2.6%, Safety & Industrial sales declined by 1.7% and Consumer revenue fell 4.3%. This can be attributed to lower automotive aftermarket, home improvement, auto-care and packaging sales. 3M saw its adjusted EBITDA expand by 350 bps y-o-y to 27.1% in Q1. This led to a solid 21% y-o-y rise in the bottom line to $2.39 on an adjusted basis. Looking forward, 3M expects its full-year organic sales to rise between 0% and 2%, and its earnings per share to be in the range of $6.80 and $7.30.
3M has taken several initiatives to improve profitability, including the divestiture of Solventum and the resolution of its major litigation. Still, there are near-term risks, including challenging macroeconomic factors, falling sales, and a weak consumer demand environment, that could adversely impact the company’s business. Overall, we believe that MMM stock is 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.
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