Investor interest in shares of 3M (NYSE:MMM) ended as fast as the stock started to rally. But by the end of last week, the stock was up 6%.
MMM stock benefited mostly from the roughly 9% rally in both the Dow Jones Industrial Average and the S&P 500.
Before that, shares benefited from speculation that increased surgical mask production would help 3M’s profits. So looking ahead, how might the company stand out from the others and rebound on its own merits?
In light of the need to stop the global spread of the coronavirus from China, 3M increased its production at its manufacturing facilities worldwide. For example, it increased the production of respirators as demand increased sharply. This trend started in January, so investors may bet that total unit sales grew from China.
And now that Europe is the epicenter of the pandemic, according to the World Health Organization, demand for 3M respirators will exceed supply in the foreseeable future.
As a frame of reference, during the swine flu and SARS outbreaks, 3M brought around $250 million in revenue. By comparison, the personal safety business generated nearly $3.5 billion in revenue last year.
And this time around, worldwide lockdowns are accompanied by higher safety equipment demand. Covid-19 is driving respirator sales. But hearing and eye protection are among the products accounting for the $3.5 billion in revenue.
Notable for investors is the company’s morals in not raising prices. Society is in serious need of protective gear. At this time, the company is not gouging its customers for the sake of raising profits to please investors.
Weak Fourth Quarter
In the fourth quarter, 3M reported organic growth falling 2.6% year-over-year. Adjusted earnings per share fell to $1.95, down from $2.31 last year. Adjusted operating margins fell from 22.4% last year to 19%. These weak figures may prove temporary.
3M’s global organizational restructuring activities cut margins by 170 basis points. Its acquisition of Acelity, a medical devices company, hurt margins by 140 basis points. Acelity broadens 3M’s business diversity. Through its subsidiary, KCI, the unit develops advanced wound therapeutics. KCI serves 90 countries and was used in over 800,000 clinical procedures annually worldwide.
Q4 also included restructuring charges of $134 million. For 2020, it will benefit from pre-tax benefits worth $40 million to $50 million.
Its safety and industrial unit, which had $2.8 billion in sales, may report higher revenue this year. Demand for personal safety may lift operating margins and total sales. Conversely, the transportation and electronics unit posted $2.3 billion in sales but that figure fell 5.9% year-over-year.
Opportunity for MMM Stock
The dividend of $5.88 a share or 4.5% annually is one reason to hold the stock. Its electronics unit continues to grow from product innovation.
Had the coronavirus not sidelined China, 3M expected strong electronics sales in the region. Still, demand for electronics in the automotive space may rebound later this year.
Revenue in China should have grown in the mid-single digits. Instead, first-quarter performance will fall. But as Chinese citizens return to work and slowly resume day-to-day activities, revenue rates will recover. Assuming the following metrics, MMM stock has upside of roughly 12%.
|Terminal EBITDA Multiple||11.1x-13.1x||12.1x|
Data courtesy of finbox.io
3M stock has a strong quality and value score compared to its peers:
3M is in the midst of a transformation that will see costs falling. Acquisitions of companies like Acelity will allow the company to achieve full-year organic growth of 10% in the next few years.
Investors should look for operating margins and return on invested capital inching higher first.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold a position in any of the aforementioned securities.