3M Company MMM is currently trading at a forward 12-month price-to-earnings (P/E) ratio of 17.13X compared with the Zacks Diversified Operations industry’s 15.11X. With a Value Score of F, MMM stock may not present a compelling value proposition at these levels.
The current valuation is above its five-year median of 15.05X. Also, the stock is overvalued compared with its peer, Carlisle Companies Incorporated CSL, which is trading at 16.46X. The company’s premium valuation compared to the broader industry and peers raises concerns, considering its revenue declines over the past nine months.
Valuation Remains an Overhang for 3M
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MMM Stock’s 3-Month Price Performance
In the past three months, 3M stock has lost 0.2% compared with the industry’s 14.2% decline. In comparison, the S&P 500 has risen 2.7% in the same period. The company has also underperformed other industry players like Honeywell International Inc. HON and Griffon Corporation GFF, which have returned 1.9% and 6%, respectively, over the said time frame.
Price Performance
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Ongoing Challenges Faced by 3M
Weakness in the consumer retail end markets, owing to a decrease in consumer discretionary spending, remains a concern. This is reflected in the Consumer segment’s results, which declined 1.2% in the third quarter, following a 2.4% decrease in the previous quarter. There was particular weakness in packaging & expression, home & auto care and consumer safety and well-being businesses.
This has impacted its overall top-line performance in the first nine months of 2024, which inched down 0.2% year over year. The company expects consumer retail discretionary spending on hardline goods to remain muted in the near term, which is likely to hurt its overall performance.
High debt level remains a major concern for 3M. Exiting the third quarter of 2024, the company’s long-term debt was high at $11.3 billion. Also, interest expenses in the first nine months of 2024 remained high at $939 million, increasing 64.5% on a year-over-year basis. Exiting the third quarter, its short-term borrowings and current portion of long-term debt totaled $1.9 billion. Considering the company's overall high debt level, its cash and cash equivalents of $6.1 billion do not look to be impressive.
Exiting the third quarter of 2024, 3M’s long-term debt-to-capital ratio was pinned at 70.69%, much higher than the industry’s 25.83%. High debt levels, if not controlled, can increase its financial obligations and prove detrimental to profitability in the quarters ahead.
3M LT Debt-to-Capital Ratio
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The company has also been subject to several litigations, including earplug lawsuits. It has committed substantial funds to resolve these disputes as ongoing litigation might lead to additional expenses. Per the terms of the Combat Arms Earplug settlement announced in August 2023, 3M agreed to pay a sum of $6 billion to resolve the litigation case over the period of 2023 to 2029.
3M’s international presence keeps it exposed to the risk of adverse currency fluctuations. This is because a strengthening U.S. dollar may require the company to either raise prices or contract profit margins in locations outside the United States. For instance, adverse foreign currency translation lowered the company’s sales by 0.3% year over year in the third quarter of 2024.
MMM’s Downward Earnings Estimate Revisions
Reflecting the abovementioned headwinds, earnings estimates for 3M have moved down over the past 30 days. Earnings estimates for fourth-quarter 2024 and 2025 have inched down 0.6% and 0.4%, respectively. Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
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Factors Aiding the Company
3M is poised to benefit from strength in the Safety and Industrial segment. Solid momentum in the industrial adhesives and tape end markets, driven by an increase in the sales of bonding solutions for electronic devices is likely to drive the segment’s performance.
Strength in the commercial branding and transportation end markets has also been driving the company’s Transportation and Electronics segment. Solid electronics demand, backed by an increase in production volume, by electronics original equipment manufacturer (OEM) customers bodes well. However, weakness in the automotive electrification market due to a decline in automotive OEM build rates remains a concern for the segment.
Conclusion
3M’s market leadership position, diversified product portfolio and strong dealer network provide it with a competitive advantage to leverage the long-term demand prospects in industrial and transportation markets. However, MMM has been facing several challenges, including weakness in the retail market, high debt level and litigation cases.
The downward estimate revision activity in earnings and expensive valuation warrant a cautious approach for existing investors. Potential investors should consider waiting for clearer signs of recovery before investing in this Zacks Rank #4 (Sell) stock.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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3M Company (MMM) : Free Stock Analysis Report
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