Shares of 3M (NYSE:MMM) are down nearly 14% this year because of the impact tariffs have had on the end markets 3M products are sold to. In addition, famed analyst Stephen Tusa, who is bearish on 3M stock and has price target of $140, which is about 15% below the current price.
The company is currently going through a restructuring, and after examining the data, I believe MMM stock presents a good value at these levels.
Analyst Opinion of 3M Stock
Stephen Tusa is not a voice investors should ignore because he sounded the warning on General Electric (NYSE:GE) and was proven to be correct. Looking at the Barron’s piece covering his downgrade of 3M stock, the following quote shows he believes the problems with 3M are structural and not cyclical.
A key point of his piece is he believes the current restructuring 3M is going through will not have any material benefits. I will be looking at the restructuring and subsequent moves 3M has made since announcing the restructuring.
“According to Tusa, 3M’s (ticker: MMM) problems go beyond simple cyclical weakness resulting from slowing electronic and automotive end market demand. Instead, he writes, the problems are structural and questions if the billions spent on recent restructuring by the company will yield any material benefits in the future.”
3M’s Business Restructuring
In March, 3M announced they would be restructuring the company from five to four business segments focusing on Safety & Industrial, Transportation & Electronics, Health Care, and Consumer.
In the press release detailing the four business segments, the company gave estimates for the annual revenue of each, shown in the table below. The shift to four divisions instead of five should help sharpen the focus within each division.
Recent Developments
Since the press release in March, there have been a number of important developments for 3M. I see these developments calming doubts investors may have about 3M being structurally challenged. The two main developments were the purchase of privately held Acelity for $6.7 billion, and two smaller divestitures of non-core businesses.
These actions point to the fact that 3M is not sitting on their hands and are making moves to sharpen their focus on growth. The first quote from the press release clearly shows the growth focus, because 3M could have easily stood pat, made small moves and repurchased stock.
Instead, they chose to go with an acquisition that can provide them with growth now and into the future. In the short-term, the second quote shows the deal will be dilutive to EPS because of one-time expenses related to the acquisition. However, once those are out of the way, the deal will be accretive to EPS.
“As a result of this announcement, 3M now expects full-year 2019 share repurchases to be in the range of $1.0 billion to $1.5 billion versus $2.0 billion to $4.0 billion previously.”
“Excluding purchase accounting adjustments and anticipated one-time expenses related to the transaction and integration, 3M estimates the acquisition to be $0.25 accretive to earnings per share over the same period.”
At the beginning of August, 3M closed the sale of its Gas and Flame detection business for $230 million in cash. The press release noted that 3M recorded part of the gain in Q2 and the rest would be reported when the deal fully closed, so it will show up in the Q3 earnings report.
Another important note for this deal is that as part of the deal, 500 employees joined the company that purchased the Gas and Flame detection business. In August 3M sold its ballistic-protection division for $91 million and noted that EPS would be neutral, so they get $91 million and does not hurt EPS.
Valuation of MMM Stock
The valuation for 3M is also appealing because as the chart from Zacks shows, the PE is at levels not been seen since 2013. In addition, another sign the valuation is appealing is the fact that shares of 3M are now yielding over 3.50%. The last time shares were yielding above 3.50%, was 2009, which is astounding and shows the scope of the sell-off since the beginning of 2018.
Some may think with stagnant earnings 3M is a value trap and I would disagree with because the trade ongoing trade issues will eventually end and when they do, many industrials like 3M will likely come roaring back.
Bottom Line on MMM Stock
The bottom line for 3M stock is that they are facing difficulties in their business right now because of tariffs and one-time costs associated with the Acelity, but those difficulties will pass. Given the moves 3M is making to sharpen its focus and grow long-term, along with their history of 60 consecutive years of dividend increases, I see 3M stock as a good value at these levels.
As of this writing, Brad Kenagy is long General Electric.
