On January 28, 3M (NYSE:MMM) CEO Mike Roman told CNBC that the company was ramping up production of its respiratory masks to meet the higher demand from the coronavirus. If you own MMM stock, this is not the good news needed to reverse its downtrend.
Once a backer of 3M, I’m starting to believe the naysayers who see nothing but a broken-down company and stock.
If there was something to fix what ails 3M, I’m sure Roman would have already done it. If you’ve owned MMM stock for fewer than two years, I’m not sure you’re going to realize profits anytime soon. And if you’ve held it for longer, this has got to be the most frustrating period in your ownership of 3M.
My InvestorPlace colleague, Josh Enomoto, recently suggested that 3M has one positive going for it: It has a nice dividend (3.7% yield), and it’s relatively cheap.
A year ago, I would have agreed with Josh. Now, I’m not so sure. Here’s why.
Masks Won’t Move the Needle
3M might have ramped up production for its respiratory masks, but that business isn’t going to be the difference in it getting to $250 where it traded as recently as February 2018.
“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,” Enomoto wrote. “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.”
Again, I like Josh’s thought process, but I just don’t see this being the difference-maker for 3M.
When the company reported its fourth-quarter results at the end of January, they weren’t nearly enough to maintain the momentum it had gained from its Q3 2019 earnings beat in October. In early February, InvestorPlace contributor and technical analyst Tyler Craig correctly pegged support for 3M stock at $154. If you look at a chart of the past month, you’ll see that it’s held firm anytime it’s approached this level.
So, if you’ve owned it for a while, I don’t think you need to sell. However, as Craig also pointed out, a better trade would be to wait until it moves to $165 or $170 when it will head back into the $150s. He’s bearish.
But I digress.
Revenues Including Healthcare Hurting
3M’s healthcare revenues for all of 2019 rose by 1.6% to $7.4 billion. That’s excluding its $6.7 billion acquisition of Acelity, a company that specializes in wound care. It contributed a 9.4% increase in sales. Overall, excluding acquisitions, divestitures, and currency, its organic revenues fell by 1.5% in 2019.
In 2020, it expects organic sales to be flat to 2% growth, earnings per share between $9.30 and $9.75, and free cash flow conversion between 95-105%. While the earnings and free cash flow sound pretty good, a best-case scenario of 2% growth in a U.S. economy that’s generally healthy doesn’t invoke a whole lot of confidence.
In the three months ended Dec. 31, the U.S. saw organic sales fall by 2.9%, while Asia, its second-biggest geographic region by revenue, saw organic sales decline by 1.7%. None of its five areas experienced positive sales growth in the fourth quarter. For the year, Latin America and Canada managed to eke out a 1.1% increase in organic sales. Otherwise, sales retreated globally.
Under no circumstance is ramped-up production of respiratory masks going to push 3M’s sales positive. It’s not going to happen.
The Bottom Line on MMM Stock
Last June, I said the following about 3M: “MMM now yields 3.61%, a very healthy return for anyone looking for dividend stocks to buy. While I believe 3M stock is an excellent long-term investment, I also think that investors looking for high dividends can find better stocks to buy.”
The two stocks were Synovus Financial (NYSE:SNV) and Bristol-Myers Squibb (NYSE:BMY). They’re up 9.1% and 41.3% since then. By comparison, 3m is down 4.6% over the same period.
Today, if you were to look at stocks yielding around 3.7%, I’m sure you could find better alternatives to 3M.
Sometimes, good companies become bad stocks. This is one of those times.
Failing some major growth igniter (not respiratory masks) appearing from the company’s transformational journey, the opportunity cost of owning 3M stock at this point is high.
You can do better.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
