3M (MMM 1.93%) recently reported first-quarter earnings and demonstrated that it's making underlying progress that significantly raises the upside potential for the stock upon a resolution to the trade conflict. As such, the risk/reward calculation has moved in favor of buying stock in the multi-industry company, and it looks like a great buy right now. Here's why.
3M continues to deliver
The key takeaway from 3M's earnings report is that the economic environment negatively impacts the company's sales, but it's outperforming expectations on margins and, ultimately, earnings. In addition, the company continues to make progress on the key operational metrics of CEO Bill Brown's turnaround plans.
Key Data Points
First-quarter organic sales growth of 1.5% was weaker than the implied guidance at the start of the year of about 2.1%. However, adjusted earnings per share (EPS) of $1.88 came in ahead of the implied guidance of about $1.71.
Moreover, management's commentary implies that this trend will continue throughout the year. For example, CFO Anurag Maheshwari told investors that 3M was "trending to the lower end of our 2% to 3%" guidance for full-year organic sales growth. He also said, "We see upside to the midpoint of our margin and earnings guidance range."
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He also noted that 3M was trending $0.10 better than its full-year guidance of EPS of $7.60 to $7.90, but management shaved $0.10 off its expectations as a contingency for the "current environment."
As such, if the tariff dispute is resolved and 3M's sales outlook can improve, it's reasonable to expect a combination of operational leverage (margin expansion due to more sales volume) and better operational performance on margin (as demonstrated in the first quarter) to lead to upside potential for EPS in 2025.
In addition, 3M's progress on Brown's key operational metrics suggests that investors will start to see earnings improvement in the near and long term.
Three operational improvements for 3M
First, Brown wants to boost the long-term growth rate by restoring a culture of innovation and releasing new product introductions (NPIs). While it will take time to develop truly breakthrough products, 3M can focus on NPIs like product line extensions. In fact, 3M launched 169 NPIs in 2024 (up 32% over 2023), and in the recent first quarter alone launched 62 NPIS, with Brown intending to launch 215 through 2025 and 1,000 over the next three years.
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Second, Brown has candidly admitted that failing to deliver products on an on-time in-full (OTIF) basis has cost 3M sales in the past, notably in the safety and industrial segment. Again, there are clear signs of improvement, with OTIF up to 89% from 85.5% in the same quarter of 2024 -- safety and industrial OTIF was 82%, with Brown aiming for 90% by the end of the year.
Finally, 3M's operating equipment efficiency (OEE) improved to 58% from the 54% reported in the fourth quarter of 2024. 3M's OEE figure is still very low and indicates the ongoing potential for 3M to add value for shareholders.
It's important to remember that all of these figures were achieved in an environment of weak sales growth; It's a lot easier to improve a business operationally when sales are booming.
Where next for 3M?
There's no doubt that 3M is operating in a trading environment with more headwinds than expected at the start of the year. In particular, the auto industry, where 3M has substantial exposure to the U.S. and Europe (auto build estimates for 2025 have both been lowered recently by analysts), poses challenges, as does another interest rate-sensitive sector, consumer electronics.
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Still, a lot of that should already be in the guidance now, raising the prospects that, should the economic outlook improve due to countries de-escalating the trade conflict, or signing the trade deals they say they want, 3M has upside potential for its sales.
With the improved margin performance and the underlying operational improvements outlined above, 3M has the potential to surprise investors with its 2025 earnings.
