If you’re an investor in 3M (NYSE:MMM) you’re aware of the perfect storm that’s swirling around the company and its stock. The company got a lift from being a supplier of essential materials for first responders during the pandemic.
That halo is long since gone. The company now faces litigation on several fronts, with the largest having to do with allegations that earplugs sold by 3M caused hearing damage for over 230,000 veterans. The case is ongoing and likely could take years to resolve.
The markets hate uncertainty. And with a worst-case scenario of over $230 billion in damages hanging over the company, that’s some major uncertainty.
Plus, the company has delivered lighter year-over-year revenue and earnings in the past two quarters. Some analysts believe that trend will only get worse as the economy continues to slow.
In this article, I’ll give you some perspective from thoughts that have been rolling around in my head as I try to make sense of MMM stock.
A Case of Mistaken Identity?
Putting aside the lawsuits, the bearish cases I read about 3M center around the lack of growth. And there’s no denying that revenue has been stagnant for the last several years. But that’s an expectation when you buy a stock like MMM.
What you don’t expect is what happened to the stock over the past ten years. At the end of 2012, MMM stock was trading under $100. Over the next six years, it soared to over $250, but revenue growth wouldn’t suggest such growth would have been possible. In fact, at one point, the stock had a price-to-earnings ratio of around 28x earnings. That was nearly double its historical average of approximately 18x earnings.
Simply put, if you were buying MMM stock at $250 a share, you were buying it when it was priced to perfection. So I can understand that if you look at 3M as a growth stock, you’ll be disappointed.
But it’s not a growth stock. And that means the current P/E ratio of around 16x earnings argues for the stock being undervalued.
What About the Dividend?
Of course, what makes MMM stock attractive to income investors is its dividend. 3M is a dividend king that has increased its dividend in each of the last 64 consecutive years. Nothing about the current situation leads me to believe that it won’t continue.
But my certainty changes once we learn what the company’s ultimate responsibility will be in the ongoing litigation. If the company becomes responsible for $230 billion in liabilities, the dividend will almost certainly have to be cut.
The Bears are Winning the Day
Historically, short interest on MMM stock has been around $1.5 billion. Today, it’s around $13 billion, and the stock has a short interest ratio of around 18%. That’s reflected in the stock price, which is down nearly 20% in the 30 days ending September 13, 2022.
That’s tough math that just layers more uncertainty into the stock. I hate uncertainty in my fantasy football lineup, and I don’t have any money riding on that. In the short term, that's enough to stop me from taking a new position in MMM stock. There's no reason to guess where the stock might bottom.
But what if you're a current investor? That brings up a different question...
Is All the Bad News Priced into MMM Stock?
That’s the question long-term investors must ask. Right now, analysts are expecting a steep drop in earnings to justify the current stock price. And analysts have been lowering their price targets since the company’s last earnings report.
It’s worth noting, however, that all of those price targets are higher than the stock’s price as of September 14, 2022. And of the analysts tracked by MarketBeat, the stock has a consensus price target of $147.43 as of September 14, 2022.
That being said, 3M is taking proactive steps to streamline the company (I.e., cutting jobs, etc.). This is normal for companies that are forecasting a recession. And I would imagine any gains to the dividend will be modest as the company looks to bolster its cash reserves due to ongoing litigation.
So could the news get worse for 3M? Sure, but what’s worse for investors right now is the uncertainty, and 3M is supplying bucket loads full of it. But for now, they’re also providing an appealing dividend for current investors. Whether those investors could, perhaps, replicate that with other stocks or by buying an ETF is a topic for another day.
