There is very little love on Wall Street for 3M (MMM 0.46%) today. And that makes complete sense given the headwinds the industrial giant is facing, both internally and externally.
And yet there is a path that leads to a massive price advance over the next five years. Here's what it would take.
The bad news for 3M and its investors
The troubles 3M faces today have made headlines across major news outlets. The most attention-grabbing have been its product liability and environmental problems. Notably, users of earplugs it sold to the military have sued the company, saying the products don't work.
And the company's forever-chemicals (which can last for hundreds of years in the environment) have resulted in damaged ecosystems, leading to regulatory scrutiny and lawsuits. These are multibillion-dollar issues.
Image source: Getty Images.
On top of that, 3M was once viewed as an innovative growth machine. But its research and development (R&D) results haven't been robust of late, and there have been questions about the strength of the company's innovation pipeline.
The Wall Street Journal even wrote a long-form article on the topic, with a decidedly negative tone. Basically, the theme was that 3M had lost its way.
With that as background, it seems reasonable that 3M's stock is down nearly 60% from its 2018 highs. Things are indeed bad right now, and investors have reacted accordingly.
Getting back to the high-water mark
What's notable here, however, is that stock declines and stock advances don't have the same math. For example, a 50% decline requires a 100% advance just to get back to the prior high. That's fairly close to the math at work with 3M today. So what would it take for this industrial giant to get back to the price levels it was at in early 2018?
From a business perspective, 3M needs to get its innovation machine humming again. It won't be easy, but the company has done it before. In fact, R&D success tends to be lumpy.
But where 3M excels is taking innovation from one segment of its business and using it in others. Think about adhesives, a business strong point, which power everything from the company's iconic Post-it notes to a host of products in its healthcare business. A couple of successes here would go a long way to reassure investors that 3M still has "it" when it comes to innovation. And any new products released would help spur growth, an added benefit.
Key Data Points
From a legal perspective, which is probably more important right now, 3M needs to muddle through the court cases it is dealing with or agree to settlements. It isn't clear that five years will be enough time to solve all of the problems it faces here, but solutions are coming.
For example, it has reached settlements with key counterparties in the earplug case and on the forever-chemical front. But there's still more work to be done, and the final cost remains uncertain. There are no miracle cures here; it is going to take hard work, time, and a lot of money.
And that's probably the biggest concern today among investors. There's a huge amount of uncertainty around how much the legal problems are going to cost 3M. Once there's more certainty, however, the outlook will be less concerning, and investors will probably start to view the company more positively.
If the costs are manageable, meanwhile, there's no reason to believe that 3M's stock won't recover its lost ground. That said, it seems unlikely that the stock would double in less than five years unless there was a very dramatic change in the current trajectory of events.
3M is not for the faint of heart
There is a path for 3M's stock to double over the next five years. But it will require a lot of things to go right on the uncertain R&D and legal fronts.
Worse, the legal issues aren't something the company can talk about, so investors aren't getting a huge amount of information on what is one of the biggest headwinds it faces. This is not a stock for investors who like to sleep well at night.
But if you are looking for a turnaround investment, 3M -- with its long and successful history -- might be worth a deep dive. Just go in knowing that there's no easy fix here.
