Why 3M Remains an Industrial-Sector Powerhouse

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Decade after decade, market old-timers (such as myself) considered 3M (NYSE:MMM) stock as a safe investment in a massive industrial-sector company. After all, 3M is a component of the Dow Jones Industrial Average as well as a consistent dividend payer.

MMM Stock: Why 3M Remains an Industrial-Sector Powerhouse
Source: TY Lim / Shutterstock.com

It’s also one heck of a diversified company. Sure, MMM stock gets pigeonholed in the industrial sector. But 3M manufactures a wide variety of products within the automotive, health care, electrical, transportation and other markets.

In fact, it could even be said that MMM stock is one of the most diversified single-company investments available. And with the spread of the novel coronavirus creating an intense demand for N95 respirator masks, 3M’s diversity and size should enhance its shareholder value significantly.

A Triumphant Quarter

3M recently released the company’s first-quarter earnings data. The impact of the coronavirus has been mixed for 3M. The manufacturing industry has taken a hit, of course, but 3M is the world’s biggest manufacturer of N95 respirator masks. So, the company was at least able to capitalize on that.

Back in January, the threat of a coronavirus pandemic was developing. In 3M responded by pledging to double the company’s global output of N95 respirator masks. The company planned to produce 1.1 billion of these masks on an annual basis.

More recently, 3M reached an agreement with the White House in which the company will import 166.5 million N95 respirators from China to the U.S. Clearly, America is counting on 3M to deliver these potentially life-saving devices. That’s a powerful argument in favor of 3M.

Another powerful argument is the company’s impressive earnings performance for the first quarter. 3M’s adjusted earnings per share came to $2.16, easily outperforming the analyst community’s projection of $2.03.

Moreover, sales for 3M’s first quarter of 2020 sales, at $8.08 billion, indicated an increase of 2.7% and beat Wall Street’s forecast of $7.91 billion. Undoubtedly, the N95 sales had something to do with that.

Acknowledging the Challenges Ahead

Still, 3M can’t just depend on N95 mask sales. Being such a diversified company means that while one segment may prosper, others are likely to struggle. The pandemic will enhance 3M’s medical supplies business, but that’s not likely to make up for all the losses in other areas.

Michael Roman, the CEO of 3M, basically acknowledged this reality during the first-quarter conference call. He conceded, “We believe Q2 results will be especially challenged given the trends we have seen so far in April.”

That’s Roman’s way of bracing the investing community for a rough landing when 3M reports its earnings data again in a few months. 3M also opted to withdraw its fiscal guidance for 2020. Again, that could be construed as a way for the company to soften the blow as the pandemic takes a toll on 3M’s financial performance.

Is there anything that 3M can do to combat the slump in global demand for its wide range of products? Probably not, so instead of worrying about what the company can’t control, it’s doubling down on N95 production.

For the time being, then, we can think of MMM stock as an N95 stock. And that’s not necessarily a bad thing since the demand is so strong. Besides, when the N95 demand abates, 3M can always ramp up production in its other manufacturing segments.

Until that happens, though, it’s all about the N95. As 3M’s CEO explains, “In the U.S., we will be producing N95 respirators at a rate of roughly 50 million per month in June, a 40% increase from current levels.” That’s serious N95 production, and the company stands to profit big-time from this.

The Takeaway on MMM Stock

Your father and grandfather might never have imagined that such a diversified company would someday depend so heavily on a single product. Yet, here we are.

Still, 3M’s dependence on N95 production doesn’t have to be viewed as a liability. Given the ongoing demand and 3M’s ability to step up to the plate and execute, MMM stock should do fine in the short term. And in the long term, 3M can always revert to its traditional, highly diversified business model.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/mmm-stock-why-3m-remains-an-industrial-sector-powerhouse/.

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