As the coronavirus from China spreads globally, economic uncertainty has deepened. However, amidst every challenge and market plunge, there are golden buying opportunities. I see one such buying opportunity in 3M Company (NYSE:MMM) stock. Since reaching $181 in January, MMM stock has tumbled 17% to $148 today. In my opinion, the stock’s valuation is attractive at this point.
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When the market’s outlook is uncertain and appears to be weak, it makes sense to go overweight on stocks with low volatility. MMM stock fits the bill.
In addition, the company is certain to report strong cash flow in fiscal 2020, indicating that it can sustain its current dividend of $5.88 per share. 3M’s dividend yield of 3.89% is attractive at a time when the 10-year Treasury bond is yielding 0.72%.
3M expects FY20 earnings per share in the range of $9.3 to $9.75. The midpoint of the guidance is about $9.53, which put the forward price-earnings ratio of MMM stock at 15.8. That valuation is attractive, considering the fact that 3M has stable cash flow and a robust dividend yield. Even after the recent meltdown, the S&P 500 trades at a P/E ratio of about 22.
The Company’s Healthcare Segment Will Drive Its Growth
I believe that, even given global macroeconomic uncertainties, 3M is well-positioned to meet its EPS guidance in FY20.
One of 3M’s segments that can potentially outperform is its healthcare business. In FY20, the company expects the revenue of its healthcare business to increase by 2%-4%.
However, with the coronavirus from China spreading around the world, the segment can grow much more. Scott Davis, an analyst at Melius Research, stated that “3M is one of only a handful of S&P names that sells a necessary product in virus containment.”
The U.S. government has already ordered 35 million N95 masks per month from 3M. Last week, 3M’s India shares jumped 20% as demand for masks and sanitizers in the country spiked.
In addition to strong demand from the U.S., 3M’s healthcare business stands to benefit from strong sales in Europe and Asia. To give investors an idea about demand for 3M’s healthcare products, the company expects “demand for respirators and other supplies to outpace supply for the foreseeable future.”
Besides the virus factor, 3M is likely to benefit from its acquisition of Acelity in FY19. Acelity has annual revenue of $1.5 billion and growth , excluding acquisitions,,of 5%. The acquisition will boost 3M’s growth in the advanced wound care industry, which is growing 4% to 6% on an annual basis.
It is important to note that 3M bought Acelity for $6.7 billion, showing that 3M is prepared to make big acquisitions to boost its growth. With 3M likely to generate $5 to $6 billion in free cash flow, the company can pursue attractive targets.
A Manufacturing Recovery Can Boost 3M’s Growth
One of the key reasons that MMM stock has underperformed in the recent past is the slowdown of the global manufacturing sector. 3M sells products to manufacturers and, with the global manufacturing sector in recession, it was likely to be hurt by the sector’s struggles.
The coronavirus outbreak has delayed the potential recovery of the manufacturing sector. However, the manufacturing sector is expected to rebound in the second half of FY20, and the recovery is likely to accelerate in FY21.
Therefore, I believe that 3M ‘s safety and industrials segment is well-positioned for strong growth, excluding acquisitions, in the next 12-24 months. That should help boost 3M’s cash flows and MMM stock.
One risk for 3M is that the prices of its raw material will continue to increase. It remains to be seen if the company can mitigate this risk by increasing its productivity.
The Bottom Line on MMM Stock
MMM stock has declined relatively sharply in the recent past. Further, the stock has underperformed in the last few quarters due to the global manufacturing slowdown.
However, 3M’s valuation is attractive, and it probably won’t cut its dividend. Further, the coronavirus outbreak will boost the company’s healthcare business. Once there are signs of sustained recovery by the manufacturing sector in coming quarters, MMM stock is likely to climb sharply.
Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
