The multi-industry industrial company 3M (MMM 1.72%) is one of the most interesting stocks in the market. On the one hand, 3M's valuation is low enough to attract value investors. On the other, the pandemic has made it difficult to monitor progress on its restructuring efforts.
Meanwhile, the company faces potential liability due to previously producing PFAS compounds. Let's take a closer look at what you need to know before buying the stock.
3M's recent history
Having lost its way and its premium valuation rating, 3M's management began 2020 determined to restructure the company for growth. At that point, anyone looking to make an investment appraisal might have thought it was simply a case of settling down and monitoring the company's progress. In particular, investors looked for improvement in the previously underperforming consumer and healthcare segments.
3M's period of operational underperformance led the market to strip it of its previous premium valuation rating. This applies to its enterprise value (market cap plus net debt)-to-earnings before interest, taxation, depreciation, and amortization (EBITDA) multiple, as well as its price-to-free cash flow multiple.
Enter the pandemic
Unfortunately, the COVID-19 pandemic had other ideas, and the distortive effects of it on 3M's sales have made it difficult to ascertain just how successful 3M's restructuring efforts have been.
The chart below shows the hit taken in the second quarter of 2020 as the economy shut down. Then 3M's respirators (safety and industrial segment) and infection and respiratory protection products (healthcare) grew strongly due to the pandemic. In addition, the stay-at-home measures gave a boost to 3M's home care and home improvement products (consumer). Meanwhile, the transportation and electronics segment continued to suffer.
Moving into 2021, all of 3M's segments are now in growth mode, and many businesses will come up against easy comparisons with 2020. As such, management expects organic local-currency sales growth in the 3%-6% range for 2021. The midpoint of the range is higher than anything 3M has produced since 2015, except for 2017.
The real question is, what can investors expect from 3M as it moves through 2021 and then into the post-pandemic environment? Many businesses (respirators, etc.) benefiting from the pandemic could see a de-acceleration or a decline in growth. Meanwhile, raw material and logistical costs are rising, and management now expects cost headwinds of $0.30-$0.50 per share in 2021 compared to a previous estimate of $0.20. For reference, company guidance is for $9.20-$9.70 in earnings per share (EPS) in 2021.
Also, 3M's automotive-related sales (spread across all of the non-consumer segments) could see a slowdown due to production curtailments at automotive manufacturers because of the semiconductor shortage. It's part of the reason why management has such a wide range (low to high-single-digit growth) for its guidance for full-year organic sales growth in the transportation and electronics segment.
However, 3M also has a collection of businesses that are set to enjoy a cyclical recovery and they can take the baton from the businesses benefiting from the pandemic.
Focus on healthcare
Performance in the healthcare segment is probably the critical benchmark of 3M's restructuring activities. Management sold 3M's drug delivery business in 2020 and bought a health information systems business and a wound care business in 2019.
On a companywide level, CEO Mike Roman has overseen a reduction in business segments from five to four. Costs have been cut, and 3M's business groups are now run globally rather than by country.
Is 3M a buy?
Based on its excellent cash flow generation, 3M is an excellent value option. For example, Wall Street analysts expect $18.6 billion in free cash flow over the next three years, a figure equivalent to nearly 16% of its current market cap. That should give Roman plenty of firepower to carry on restructuring the business and prepare for any potential PFAS liability.
Cautious investors will want to continue waiting for some hard evidence of an improvement, particularly in the healthcare segment, as the multi-billion dollar acquisitions continue to settle in. However, for most investors, 3M continues to present a good value option.