3M (MMM 0.46%) probably isn't going to make the average investor a millionaire. Nevertheless, the potential for significant long-term returns exists, contingent on management's successful restructuring for growth.
It's an attractive value proposition because, based on the commentary of new CEO Bill Brown, there's plenty of scope for improvement, and he has the opportunity to build on the tangible enhancements already in place at 3M. Here's how it can generate value for shareholders over the long term.
3M's potential improvements
Brown talks about implementing three key priorities: generating sustained organic growth, improving operational performance, and effectively deploying capital. As such, 3M investors eagerly await the company's Investor Day presentation on Feb. 26, where he will outline his strategic vision for the company in more detail.
That said, Brown has already provided plenty of detail on what needs to be done, and the following three opportunities align with the above priorities.
Key Data Points
1. Building on the existing restructuring
3M has long been a business in need of restructuring. It has been beset by legal challenges over its production and use of synthetic chemicals and allegedly faulty earplugs for the military, years of lackluster sales growth, long-term margin decline, and a healthcare business that took up a lot of management time and capital (more on that in a moment).
In fairness, former CEO Mike Roman did undertake restructuring, including job cuts, dropping less profitable consumer product lines, and reducing facilities and management layers. The good news is that some of the benefits are already apparent in the company's numbers.
As you can see below, sales growth was mediocre in 2024. Gains in areas like industrial adhesives, electronics, roofing granules, and advanced materials were offset by declines in products for consumer safety, automotive uses, and home care. Still, margin improvement (primarily due to actions on productivity) led to a significant rise in earnings in the first three quarters.
|
3M |
First Nine Months 2023 |
First Nine Months 2024 |
Change |
|---|---|---|---|
|
Adjusted net sales |
$17.64 billion |
$17.82 billion |
1% |
|
Adjusted operating margin |
18.2% |
22% |
Up 380 basis points |
|
Adjusted operating profit |
$3.22 billion |
$3.92 billion |
22% |
Data source: 3M presentations. 100 basis points equal 1%
As such, it's right to think of 3M as a business with margin improvements already in place, and one where much more can be done.
While the original restructuring actions have largely been achieved (including the $700 million to $900 million in charges for them), it was always the understanding that the benefits would continue into 2025. Indeed, Brown confirmed as such on the last earnings call when talking about these actions, saying, "A lot of these things are going to be realized over time."
2. Spinning off healthcare to refocus on core business
Roman also oversaw the spinoff of the healthcare business Solventum. In recent years, this segment had been the focus of 3M's capital allocation policy, with a series of major acquisitions and disposables, including buying wound-care business Acelity for an enterprise value (EV) of $6.7 billion and M*Modal's artificial intelligence business for an EV of $1 billion.
Last year, Brown had indicated that research and development costs, excluding all investments related to the healthcare business, have been about $1 billion per annum over the last few years, and has been falling on a real basis (i.e. after accounting for inflation), resulting in declining new product development. But now with the underperforming healthcare business spun off, Brown has an opportunity to focus on 3M's core industrial and consumer businesses while cutting some unnecessary costs. Now, it's a smaller and leaner company.
Moreover, a determination to improve the development of innovative new product introductions (NPIs) could bear fruit with increased investment in research & development.
Image source: Getty Images.
3. Operational improvements
Among the key necessary operational improvements, Brown has already noted an opportunity to improve and consolidate its mammoth supply chain (3M has 25,000 suppliers with 80% of its raw materials coming from single sources), reduce waste (running at 5% of the cost of goods sold), improve 3M's asset utilization from a lowly 50% , and improve on time in full deliveries.
Brown is likely to reveal progress levels in these areas in February, but if you are looking for hard numbers, he believes that the number of days it holds inventory before selling it (called days inventory outstanding) should be closer to 75, when at present it's around 100 days and above its peers.
MMM days inventory outstanding (quarterly), data by YCharts.
Reducing it to 75 days would generate an extra $1 billion in cash flow -- a significant target to aim for.
A stock to buy?
A combination of follow-through from Roman's restructuring and Brown's operational improvements means that 3M investors can expect some margin expansion in 2025 and beyond. Meanwhile, the renewed focus on NPIs should improve long-term growth.
There's no quick fix at 3M, but there's plenty of potential for progressive margin expansion and, in turn, earnings in the coming years -- something that is likely to lead to excellent returns for investors.
