Another day, another Wall Street analyst upgrade for 3M (MMM -0.63%) stock. This time, it's from Vertical Research analyst Jeffrey Sprague, who upgraded the stock from "hold" to "buy" and increased his price target from $92 to $140. That target implies a 33% upside over the next 12 months from the current price.
Vertical Research may not be a household name among retail investors. Still, I think Sprague is one of the best analysts in the industrial sector, so his upgrade deserves close attention.
3M's latest upgrade from Wall Street
According to The Fly, Sprague's upgrade rests on a risk/reward calculation that favors buying the stock. That's the best way to think about the stock because 3M is not firing on all cylinders right now or has not done so in recent years. Still, stock prices have no memory, and 3M's new CEO, William Brown, has an opportunity to turn things around.
That opportunity rests on completing the restructuring program, which is already expanding profit margins while continuing to restructure the existing portfolio and investing for growth. Brown's job will benefit from the increased cash flow from the recent dividend reduction.
There's also $7.7 billion in cash from the Solventum spinoff, representing a 19.9% stake in Solventum (currently worth $2.1 billion). That can be used to support legal payments of $9.3 billion due over the next five years regarding the PFAS settlement, and the $6 billion due from 2023-2029 to compensate users of faulty combat arms earplugs.
Meanwhile, 3M is a cash-generative business, with around $3.9 billion in free cash flow expected in 2024.
3M's price target
Trading on less than 15 times the estimated FCF for 2024 (and assuming the Solventum proceeds cover the legal settlements while management turns the business around), 3M looks like a decent value. The only disagreement is that Sprague's price target of $140 (putting it on 20 times 2024 FCF) is too aggressive. Something closer to JPMorgan's $111 target is more reflective of the risk that still faces the stock.
