An HSBC analyst recently raised the investment firm's price target on 3M (MMM -0.99%) stock to $115 from $91 and upgraded its rating to buy from hold. The upgrade implies a nearly 15% upside for the stock over the next 12 months. It's the latest upgrade for the stock as Wall Street warms to the company after its recent earnings report, implied dividend cut, and spinoff of healthcare business Solventum.
The rationale behind the upgrade
The HSBC analyst notes that the recent results suggest 3M's latest restructuring actions (initiated last year) are starting to bear fruit, with profit margins expanding and management forecasting 0% to 2% adjusted organic sales growth in 2024. That may not sound like much, but note that without Solventum, 3M is now primarily a cyclical company, and on a comparable basis, its organic sales growth declined 4.4% in 2023.
Some of its key end markets, such as semiconductors and electronics, are showing signs of inflecting in 2024. In addition, the Solventum spinoff will result in $7.7 billion in cash to 3M, while it retains a 19.9% stake in the healthcare company, which can be sold to raise cash. The dividend cut further strengthened the balance sheet, giving investors confidence it can meet the multibillion-dollar cash calls coming from legal settlements in the coming years.
A stock to buy?
The analyst upgrades for 3M aren't so much based on the idea that 3M is a high-quality company firing on all cylinders. Instead, the case for the stock rests on its undervalued potential for its ongoing restructuring program to generate lasting margin expansion.
In addition, the legal settlements and dividend cut help to reduce uncertainty around its balance sheet. All told, 3M stock does look like a decent value at this level, and a combination of improving end markets and margin expansion in 2024 should help the investment case while investors wait to hear William Brown articulate his vision for the company as its new CEO.
