Few blue-chip stalwarts are as frustrating as industrial and applied-science company 3M (NYSE:MMM). It’s true that modern society is increasingly leaning toward innovations that deal with the digitalization of everything. Still, the need for “analog” products and services will never expire. Therefore, 3M stock should at least enjoy some baseline of demand.
Instead, investors have punished 3M stock seemingly at any and every opportunity. Since peaking almost two years ago to the day, the industrial giant has only enjoyed temporary moments of traction. Inevitably, though, the floor would give away, resulting in the mass printing of red ink.
However, the last few months seemed different. Sparked by a third-quarter earnings beat and the low share price, 3M stock ended December on a high note.
Unfortunately, any hopes of a recovery were dashed when the company reported results for Q4 2019. With 3M stock again taking another big beating, it doesn’t seem to offer much for prospective buyers.
Granted, this is one of the riskier names within the Dow Jones. Still, I think there’s an opportunity here for investors who recognize 3M for what it is: an undervalued, dividend-bearing equity. But first, let’s go over the three headwinds impacting shares and later, I’ll discuss why they might not be such a huge deal.
Trade War Impact Bites 3M Stock
True to his nature, President Donald Trump loves to declare victory on everything he has set out to do. Naturally, he feels the same way about the bitter U.S.-China trade war.
Whatever the case, the real issue is that many American businesses feel differently. Not only that, they’ve got the painful evidence to prove it. For 3M, management declared a second round of layoffs, announcing a 1,500-job cut late last month. That comes atop an initial round of layoffs less than a year ago, affecting 2,000 jobs.
A slowdown in China’s economy hurt 3M’s many businesses. Unlike other large companies, 3M simply didn’t have the robust revenue channels to absorb and parry the slowdown. Additionally, a manufacturing slump in the U.S. forced the organization to make the painful cuts.
Earnings and Guidance Disappointment
Recently, 3M released its Q4 2019 earnings results. On paper, the performance wasn’t too bad. Profitability expectations were in line with what management guided previously.
But it was the earnings guidance for 2020 that had Wall Street concerned. Management expects to earn $9.52 a share, while covering analysts anticipated $9.59.
Another blight on the earnings print was revenue. A few businesses, most notably the safety and industrial division, and transportation and electronics suffered sales declines. That’s not surprising given the wide-ranging impact of the trade war. Further, China’s automobile sales have declined precipitously in 2019.
Finally, I don’t think the investors were in any mood to be optimistic toward companies dependent on China. With the coronavirus outbreak hurting Chinese businesses throughout the country, the immediate outlook for 3M stock looks poor; hence, the sharp decline.
Chemical Dumping Scandal Hurts 3M’s Image
If these factors weren’t enough, 3M is mired in an ugly chemical dumping scandal.
In December of last year, a federal grand jury issued a subpoena against the industrial giant. The accusation is that 3M’s Decatur, Alabama plant released “a chemical into the Tennessee River that is prohibited from entering U.S. waterways. 3M admitted its violation of the Toxic Substances Control Act in an April 2019 letter to the Environmental Protection Agency.”
I don’t want to get too deep into possible implications for 3M stock. However, the main takeaway is that it’s another black eye for an increasingly embattled organization.
Why You Should Consider MMM
Despite the obvious headwinds hurtling at 3M, I believe that shrewd investors have an opportunity to pick up a viable dividend stock for cheap. No, this name isn’t going to make you rich. What it will do, however, is give you stability in your portfolio as well as the possibility of upside returns.
Here’s why: the first two headwinds are clearly related to each other. Having a trade war with the world’s second-largest economy is not something any business wanted. But it’s what the Trump administration did, and everyone must live with the consequences.
That said, the point is that this probably isn’t a recurring event. Moreover, relations between the U.S. and China are thawing, which bodes well for 3M stock. Should the two sides make good on the implications of their phase one trade deal, some of the headwinds should at least stop being headwinds, if not outright transition to tailwinds.
On the point of the chemical dumping scandal, this one hurts. However, this is not the first time that an industrial company violated environmental policies, nor will it be the last. I think ignoring 3M stock based on this controversy is short-sighted given our history of apathy.
Ironically, the coronavirus crystalizes the broader bull case for 3M. With fears turning to panic, protective face masks have flown out the door worldwide. That benefits 3M, which specializes in such analog products.
No matter how advanced our technology gets, you can’t build an app to protect against a real virus. And that’s why 3M will always be relevant.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.