3M (MMM 0.86%) attracts a lot of interest from investors, and it's not hard to see why. Trading on around 12.3 times estimated 2022 earnings, a 4.7% dividend, and bundles of cash flow, the stock passes many value investors' filters.

There's a strong case to be made for buying the stock, but there are also some negatives. So let's look at what the company needs to do next year before its stock becomes a buy. 

3M in recent years

Understanding where a company has come from is an excellent way to start appreciating what needs to happen next. So let's focus on its operational performance rather than the well-documented legal issues around the stock. 

In a nutshell, 3M has had two significant problems in recent years. First, it's struggled to grow its revenue above industrial production and GDP growth. While that's not inexcusable, it's not the sort of top-line performance investors expect from a company trying to grow. 

Second, despite significant operational restructuring actions, portfolio adjustments through acquisitions and divestitures, and cost-cutting measures; 3M's gross profit margin and operating profit margin appear to be going nowhere fast. 

Over the last few years, management has paired its operating segments from five to four, significantly adjusted its operating structure (businesses are run on a global basis rather than by country), made multibillion-dollar acquisitions (in its healthcare business), and cut thousands of jobs

However, margin expansion remains hard to come by, as seen in the chart.

MMM Operating Margin (Annual) Chart

Data by YCharts

What about 2023?

The question now turns to how 3M can rectify the situation. Unfortunately, the answer doesn't lie in pricing. The company and much of the industrial sector had to deal with soaring raw material and supply chain costs in 2022. To be fair, 3M did use pricing to offset costs, but ever mindful of retaining market share, management is taking a "very thoughtful" approach to pricing, according to CFO Monish Patolawala on the last earnings call.

3M's strategy isn't to use significant price increases to generate margin expansion. Instead, it prefers to generate margin expansion through volume growth. The argument is that volume growth generates so-called "economies of scale," whereby production becomes more efficient as volumes grow. 

Unfortunately, given the slowdown in the economy, it's unlikely that 3M investors can get too excited about the prospects for volume growth in 2023. CEO Mike Roman noted, "We see near-term softness in consumer electronics," and 3M will spin off its least cyclical business, healthcare, in 2023. As such, relying on volume growth isn't the answer to the margin question. 

What management said on the matter

The subject was addressed on the last earnings call, with Roman saying, "We see a significant opportunity to reduce the cost of goods sold, and working capital as global supply chains improve, which includes leveraging data and data analytics to drive productivity in our plants." Roman went on to describe it as a "self-help" opportunity for the company in 2023. 

The opportunity can be seen in the chart. Soaring cost of goods (COGS) -- both in absolute terms and as a share of sales -- have crimped gross profits and margins in recent years. However, an easing of the supply chain crisis will certainly help 3M.

In addition, exiting the healthcare business will help refocus 3M, and hopefully, management can start generating some significant gross profit margin expansion. The healthcare business is actually one of 3M's problematic areas in recent years. 

MMM Operating Margin (Annual) Chart

Data by YCharts

3M in 2023

With volume growth hard to come by and price increases not an option (at least in terms of expanding margin), the key way to "judge" 3M is progress on reducing COGS as a share of revenue. Management has signaled this, too, so investors should keep an eye out for it.

Until meaningful progress is made on margins, 3M is one for the watch list. Unfortunately, the company's restructuring efforts haven't done much for margins in recent years, so the jury should still be out on the stock. Still, if it can make progress, the stock could start to look a great value.