Sell the Bounce in 3M Stock

MMM stock has recoiled off multi-year lows, but investors should beware

Finally, shares of 3M (NYSE:MMM) have bounced. The 3M stock price has rallied almost 9% since late May, when MMM stock touched a three-year low.

Sell the Bounce in 3M Stock
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That low was reached thanks to a hugely disappointing first-quarter earnings report in late April. Lowered guidance and a big miss led the 3M stock price down 13%; that’s an absolutely huge move for a Dow Jones Industrial Average component.

In fact, it was such a big decline that 3M alone took almost 200 points off the Dow. It was the biggest decline in MMM stock since the 1987 stock market crash.

Incredibly, it got worse: 3M stock kept falling. At those lows, MMM had declined 27% in less than six weeks.

From that standpoint, the rally of late isn’t surprising or concerning to those of us who question broader market valuations. Dividend stalwarts like Procter & Gamble (NYSE:PG) and McDonald’s (NYSE:MCD) trade near all-time highs. Income investors looking for dividends and value are looking to 3M stock for the obvious: shares are seemingly “on sale” and yield a still healthy 3.3%.

But it’s not necessarily a good thing to pick one stock because others are too expensive. And the bounce in 3M stock ignores the fact that the decline occurred for good reason. 3M’s business isn’t healthy. Longer-term headwinds remain intact.

Furthermore, MMM stock — yield or no yield — isn’t that cheap. Investors looking to jump on 3M need to remember that price and dividend yield alone don’t make a buy case.

The Case Against MMM Stock

The argument against 3M stock at this point is reasonably simple: significant end markets are in rough shape. As 3M CFO Nicholas Gangestad noted at a recent conference, 30% of revenue comes from automotive, China, and electronics.

None of those markets seems healthy at the moment. Sales in the three markets combined fell “mid-single-digits” in Q1, leading organic sales on the whole to decline. But this isn’t a single-quarter problem. “Peak auto” is a long-running concern. Chinese demand is slowing, and the trade war may well impact 3M’s positioning longer-term. Electronics prices continue to fall, putting pressure on manufacturers which may make its way to 3M.

What’s notable is that beyond those three markets, it’s not as if performance was all that impressive. 3M’s commentary suggests that the other roughly 70% of the business maybe grew organic sales 1% in Q1.

Plus, cyclical worries could hit demand. Inventories are at high levels, as analyst Stephen Tusa — who has been prescient about the fall of General Electric (NYSE:GE) — has noted. Growth is stalling out at the end of the cycle. This raises the question of what will happen once that cycle inevitably turns.

The Case for 3M Stock

It’s easy to argue with 3M that this, too, shall pass. It’s a 117-year-old company: 3M has been through worse and come out on the other side. Revenue is diversified. China may well bounce back. 3M is a dividend king, with 61 consecutive years of payout increases. That logic suggests the applied-sciences giant will be just fine.

Meanwhile, a 17-times forward multiple leaves the 3M stock price relatively cheap, even after the bounce. A 3.3% dividend yield means investors “get paid to wait” for the business to improve.

But that case seems too thin, and too high-level. There are real problems in the business right now. So real, in fact, that 3M had to cut guidance three months after it was issued.

As far the broader argument about 3M’s history, multiple, and dividend, investors could have made the exact same argument about GE. They could have said much the same about healthcare distributor Owens & Minor (NYSE:OMI), or Kraft Heinz (NASDAQ:KHC) and Anheuser-Busch InBev (NYSE:BUD).

To be sure, I don’t expect MMM stock to follow the trajectory of those names, who slashed their dividends and have fallen — in the case of OMI — as much as 90% in recent years. 3M’s dividend may be at risk at some point, but it appears safe for now. (The company is pulling back on share repurchases, however, after its recent acquisition of medical products manufacturer Acelity.) And I’m not betting on 50%+ downside for MMM stock.

Concluding Thoughts

But this isn’t a case where the market is overreacting. Neither is a nervous market taking down the 3M stock price. The market is at all-time highs, but 3M isn’t.

Therefore, investors aren’t overreacting to some perceived external threat; 3M delivered the bad news itself. Anyone buying the dip here should keep that in mind.

As of this writing, Vince Martin has no positions in any securities mentioned.


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