Let me offer an upfront mea culpa on 3M (MMM +2.60%). I bought the stock, lost money, and sold most of my position to capture my loss for tax purposes. I learned a valuable lesson along the way (more on this below). But after a seemingly strong second-quarter earnings performance, given that the stock rose 5% on the release, is 3M a buy, sell, or hold today?
Beating the number
The diversified industrial company reported second-quarter revenue of roughly $8.3 billion. That was a few percentage points higher than the figure Wall Street analysts had been expecting, on average. 3M's adjusted earnings tallied up to $2.17 per share, way better than the analyst consensus estimate of $1.65. Investors like to see a company beat on the top and bottom lines, so it makes sense that the stock jumped 5% on the earnings update.
Image source: Getty Images.
The gain was fairly robust, as well, with a big early advance that held throughout the trading day (see chart below). Clearly, investors liked what they saw from 3M. Over the long term, I think there's notable turnaround appeal in the business. But that doesn't mean that there are no headwinds. Inflation and economic slowdowns are, in fact, taking their toll.
For example, while revenue came in above expectations, it fell 4% year over year in the quarter. The $2.17 per share of adjusted earnings, meanwhile, was down from $2.45 in the second quarter of 2022. Simply put, 3M isn't hitting on all cylinders right now. This is still a turnaround story, which is something that only more aggressive investors should be looking at.
The "other" issue
If operating weakness was the only issue facing 3M, I would be much more sanguine. The company has survived economic ups and downs before and continues to thrive. A heavy focus on innovation, for example, has repeatedly resulted in new growth platforms that can be used across its diversified business. But there's more going on here, and it was highlighted by the $14.19 per share charge for a legal settlement in the quarter, a number that was not included in the adjusted earnings figure.
That charge was related to a $10.3 billion settlement around forever chemicals. However, that's just one settlement covering a few hundred claims. It is highly probable that there will be more legal and regulatory issues around forever chemicals before the problem is behind 3M. This is more likely the start of the solution than the final resolution, which means still more costs lie ahead.
Key Data Points
Add to that the company's ongoing legal fight over earplugs it sold to the U.S. military. Resolving this particular legal headwind could end up being a significant one as well. And it is still working its way through the courts, so there's no clear way to put a price tag on the financial hit yet. Even if the company ends up winning, it will face material legal costs as it continues its fight.
Most should avoid it
The big takeaway is that uncertainty remains very high, and there's no way to quantify the risk or monitor it since legal issues can't be openly discussed by management. That, by the way, is the reason I sold most of my position in 3M. I think 3M is a good company, but there are too many unknowns that can't be tracked for it to pass that test. (My lesson: Pay more attention to legal/regulatory problems in the future.)
Again, only more aggressive investors willing to own an uncertain turnaround story should be looking at 3M today. Sure, if things work out well, some intrepid investors could end up making a lot of money as the stock recovers. But if things don't work out well, the stock could end up being a trouble spot in your portfolio for years to come.
