What happened
It had already been a rough year for 3M (MMM +0.79%) heading into September, and the stock continued to swoon as the company warned of sluggish growth heading into 2024. The macroeconomic environment also seemed to worsen after the Federal Reserve promised to keep benchmark interest rates higher for longer following its September meeting.
Shares of the industrial conglomerate had popped at the end of August after the company announced a $6 billion settlement to resolve a lawsuit over faulty military earplugs. However, the company gave back those gains and then some last month, falling by 12% according to data from S&P Global Market Intelligence.
As you can see from the chart below, the stock traded fairly evenly with the S&P 500 for the first two weeks of September before falling more sharply than the index through the remainder of the month.
So what
3M's worst day of the month came on Sept. 13 as the stock fell 6% in the wake of remarks that CFO Monish Patolawala gave at an industry conference.
The CFO said that demand for consumer and electronic products had been weak as spending shifted toward staples and services, and he lowered the company's revenue guidance for the third quarter to a range of $7 billion to $8 billion, down from a previous forecast of $8 billion. He also pointed to a weak economic recovery in China and warned of a slow growth environment lasting into 2024.
Following that update, the stock traded sideways for the next week as it received a hold rating from HSBC, and then closed out the month on the decline following the Fed's interest rate decision.
While the central bank left the benchmark federal funds rate steady at 5.25% to 5.5%, it projected that it will have to keep rates higher through 2024 and 2025 than it had previously expected. That outlook weighed on cyclical stocks like 3M, which are sensitive to interest rates, which impact business and consumer spending. And if the U.S. economy were to enter a recession, 3M would feel the impact.
Key Data Points
Now what
3M got off to a slow start in October as well, falling 3.6% to start the month on Monday, even though there was no news relating to the company.
At this point, the stock looks well priced, trading at a price-to-earnings ratio of just over 10 based on the company's forecast for adjusted earnings per share of $8.60 to $9.10 for the year. It also offers an attractive dividend that yields 6.4% at the current share price, and management has a long track record of raising its payouts.
Additionally, the upcoming spin-off of its healthcare business could serve as a catalyst for a share price recovery.
Investors should expect this stock to remain sensitive to macroeconomic conditions, but there's a good case for buying it at the current price.
