3M (MMM 2.74%) stock was holding up firmly this year until its quarterly earnings report came out this week. Despite surpassing earnings estimates, shares of the industrial conglomerate crashed this week and were trading 10.4% lower through 10:30 a.m. ET Friday, according to data provided by S&P Global Market Intelligence. While its outlook for 2024 fell short of analysts' estimates, the primary concern is that 3M could revise its guidance later in the year given two major events coming up.
3M hopes to spin off healthcare and settle lawsuits in 2024
3M raised its 2023 adjusted earnings per share (EPS) guidance for the second time in the third quarter and hoped to earn up to $9.15 per share. It eventually reported an adjusted EPS of $9.24 per share for 2023, beating its guidance.
3M is coming off of what was its biggest year of restructuring ever, thanks to which its operating margin under generally accepted accounting principles (GAAP) shot up to 15.5% in the fourth quarter from 7.8% in the year-ago quarter. Even after adjusting for restructuring and other nonrecurring charges, 3M's operating margin rose to 20.9% in Q4 from 19.1% in the year-ago quarter.
Key Data Points
For the full year, though, 3M reported a negative GAAP operating margin of 27.9% as it recorded pre-tax charges of $4.3 billion and $10.5 billion, respectively, on public water supplier (PWS) and combat arms lawsuits. 3M has defended multiple lawsuits for decades related to several products, including masks and respirators, defective earplugs, and PFAS chemicals contaminating drinking water. Last year, 3M reached agreements with PWS and combat arms that are now subject to the court's approval, and recorded pre-tax charges accordingly.
From that standpoint, 2024 is an important year for 3M as it strives to finalize the lawsuit settlements. Meanwhile, 3M is planning to spin off its healthcare business later in the year. Healthcare generated $8.2 billion in sales in 2023.
One risk to be aware of before buying 3M stock
The settlement of two of its biggest lawsuits will be nothing short of a milestone for 3M, but at what cost? 3M's restructuring and layoffs are part of its plan to cut costs to fund the lawsuit settlements. The company is also divesting healthcare primarily to raise funds for the same purpose. At 3M's fourth-quarter earnings conference call, management clearly stated that without the proceeds from healthcare's proposed spinoff, the company hasn't concluded how it'll fund the legal settlements.
Worse yet, the settlements are facing pushback and there's no guarantee that the courts will approve the amount agreed upon yet. To top it all off, 3M still faces PFAS and other lawsuits from several more countries and its liability could run into the several billions of dollars in the coming years.
That explains why 3M management has been caught up in the legal tangle and has not been able to focus on innovation and sales. For 2024, too, 3M projects adjusted sales growth of only up to 2.25% at the higher end and adjusted EPS of $9.35 to $9.75 a share.
The problem is that 3M's numbers in 2024 could eventually look much worse as its outlook does not include the impact of healthcare's spinoff and legal settlements. This is just one of the reasons why even patient investors in 3M stock may have run out of patience this week.
