There are few - if any - conglomerate stocks that can decline by as much as 62% and still not command the massive waves of investment that these blue-chip names typically do, today the story seems to take a turn on its head, providing investors with the opportunity to buy one of America's household names at fire sale prices.
3M
Investors can either begin to panic and believe the company is dead; or, more sensibly, start to get excited at the opportunity to buy this great discount potentially.
The company has successfully gone through its latest set of legal issues, where lawsuits around a couple of its products sparked a new fear wave amongst investors, a reached settlement that implies no immediate danger to financials - and dividends - may be the beginning of a new bull run in this stock.
This is why analysts believe in this story so much.
Favorable Trends
As the July ISM manufacturing PMI report would suggest, the chemical industry has been undergoing a bit of a turnaround over the past month. New orders rose for the first time in at least six months, implying that the broader sector is beginning to bottom in this low-demand environment, opening up the way for new business.
The benefits from these trends can take some time to trickle down into individual companies; however, 3M management already knows how bright the future can be for the stock. During the past twelve months, the company repurchased 18.8 million shares off the open market, the ultimate vote of confidence from management.
These actions would suggest that the stock may not only be undervalued but that the coming months - or year - may hold a few pleasant surprises. These developments may be already taking place, as investors can digest the latest quarterly financial results. As the industry begins to find a bottom, investors can move past the initial 4.3% contraction in sales and get into the juicier parts.
Gross margins grew from 41.5% in 2022 to 44.7% in 2023, which speaks volumes of industry supply and pricing power improvements. However positive these trends may be, the rest of the income statement takes a dire turn to deep losses.
The quarter ended with a net loss of $6.8 billion, though this time, bad news is actually good news.
As 3M plans to restructure its corporate footprint to streamline efficiency and global presence to drive profitability and take on further market share, some non-recurring (not typical or part of the core business) may be taken on. In this case, a $10.3 billion charge related to the lawsuits around public water system issues.
Investors can save time on the tedious task of adding back these charges and adjusting for tax since doing this would reflect the true earning power that the company would have otherwise reported. Officially, earnings per share came in at a negative $12.35. However, the adjusted earnings per share would have looked more like $2.17.
With this in mind, the current consensus price target set by 3M analyst ratings looks pale. A $115.83 target would only represent a price-to-earnings multiple of 13.5x to 12.7x of full-year management-guided EPS, significantly compressed from the stock's historical 20.0x average.
Clear Skies Ahead
The worries of the pending lawsuit can now be dismissed. Despite the large amount to be paid, 3M negotiated a payout period that dilutes any adverse effects. A $10.3 billion settlement is to be paid over 13 years, which amounts to approximately $793 million in payments per year.
Considering that 3M's free cash flow (operating cash flow minus capital expenditures) has been an average of $5.2 billion over the past five years, the annual lawsuit payment is nothing but a blip in a distant radar. Today's dividend yield of 5.8% is safe, relieving some of the doubts investors had over these payouts.
Management has saved the day once again, and once it is done with the underlying restructuring programs and further buybacks in the stock, profitability and other vital metrics are also due to rise. These dynamics will surely bring the stock price closer to its former glory, giving investors the proper blue-chip treatment with golden-quality dividends.
