3M: Record Low Prices/FCF, Litigation Pessimism Priced In (NYSE:MMM)

Spinoffs have been a popular value-add move for Wall Street executives over the past year. The big event in 2022 is GE’s divestiture of its healthcare business in early 2023. Johnson & Johnson (JNJ) followed with Kenvue (KVUE)) just two months ago, there was a flurry of new share offerings at the end of the second quarter.

3M Company (NYSE: MMM) is probably the next thing to do.There are other positives for MMM to consider in the course of the lawsuit and its PFAS and combat arms liability, such as the recent divestiture of 3M Healthcare appointment of chief executive. The positive signal came as the stock wobbled after earnings topped expectations.

I reiterate my Buy rating on 3M, but acknowledge that technical risks are rising.

Global Quarterly Split Number

according to 3M was founded in 1902 as a mining company, according to Bank of America Global Research. Today, the Minnesota-based company is a diversified global manufacturer. Its businesses are technology-driven and organized into four segments: Consumer, Security and Industrial, Transportation and Electronics, and Healthcare. Its popular brands include Scotch, Post-It, 3M and Thinsulate, and the company holds more than 500 US patents. The $54 billion industrial conglomerate in the industrials sector trades at a low trailing 12-month non-GAAP price-to-earnings ratio of 11.2, but has a high dividend yield of 6.1%.

Back in July, MMM to report Earnings were solid in the second quarter. Earnings per share were verified at $2.17, beating the consensus estimate of $1.76, while revenue of $8.3 billion was down 4% year-over-year but better than the $7.9 billion estimate. Still, cash flow from operations rose 34% from a year ago, and adjusted free cash flow jumped 44% to $1.5 billion. To assuage investor concerns, management modestly raised its full-year 2023 adjusted EPS forecast to $8.60 to $9.10 from $8.50 to $9.00.

The second quarter results were characterized by strong margins across all divisions, driven by effective inventory management and cost control. However, challenges remain, with weakness in the Chinese market negatively impacting profitability. On the conference call, the management team pointed to some deflationary trends, which have had a positive impact on its logistics, but commodity and labor costs remain high. The company expressed confidence in its pricing strategy, citing pricing adjustments for deflationary scenarios.

Very cheap price vs free cash flow multiple

Historically High Dividend Yield

Potential upside factors that could help the share price include minimal market reaction to PFAS liability issues, possibly due to priced-in pessimism, limited PFAS-related legislative action, and better-than-expected operating results. Conversely, bearish factors that could weigh on MMM include the need to increase investments that impact margins and a slower-than-expected recovery in the markets in which it operates. The company could also cut its high dividend to help pay for the legal settlement.

exist ValuationBank of America analysts expect earnings to fall more than 9% this year, but expect earnings per share recover quickly Growth is expected to be 15% this year, and earnings per share should be close to $11 in 2025. Bloomberg’s consensus forecast is about the same as that of Bank of America, although much depends on the outcome of the lawsuit in the coming months.

Meanwhile, dividends are expected to rise modestly over the next few quarters, while MMM trades at a depressed P/E ratio, while its yield is historically high. Also, with an EV/EBITDA ratio well below the S&P 500 average, the industrials giant’s valuation appears attractive. Also consider its free cash flow yield of over 8%, currently trailing 12-month free cash flow per share of $7.98.

3M: Earnings, Valuations, Dividends, Free Cash Flow Forecasts

Taking a closer look at the valuation, I think the forward operating P/E of 11 times far exceeds the potential after-tax NPV of all its legal settlements of $30 billion. If we assume a normalized EPS of $10.50 and apply a multiple of 12, the stock should be trading near $126 today. Still a substantial discount of 29% compared to MMM’s 5-year average forward non-GAAP P/E of 16.9.

3M: A Compelling Valuation Metric

Also consider that its industrial peers trade at an average P/E ratio of just over 20 times, which is low for most sectors. high profitMMM is not bad EPS Revision The stock was looking for a bottom after its latest earnings report. That said, I definitely admit that its valuation is somewhat discounted relative to its competitors due to the lack of clear legitimate payouts. Not shown in the chart, 3M’s peers in the Consumer Products industry are also relatively expensive.

MMM: Peer Analysis

Looking ahead, BMO’s unconfirmed third-quarter 2023 earnings date is Tuesday, October 24, according to corporate activity data provided by Wall Street Horizon. Until then, there are few volatility catalysts on the calendar.

Corporate Events Calendar

technical points

As early as the first half of this year, I initiated coverage 3M has a Buy rating based on its strong cash flow and earnings profile. However, I point out that the bears are in control of the technical charts. Notice in the image below that the technology hasn’t changed much. The bears did hit the bulls hard by rejecting the stock when the stock attempted to break above its long-term declining 200-day moving average after the earnings report in late July.

The RSI Momentum Index has now returned to near the 40 level, and the stock price seems unable to maintain its upward momentum. While I see support around $90, I would really like to see stronger buying pressure rising below $100. We haven’t seen that yet. My concern is that the stock continues to search for lows and may capitulate further lower.

While MMM has performed well since my end-May outlook, I assert that potential buyers will have the opportunity to buy at lower prices as we head into a dangerous September. Finally, resistance is at the 200-day SMA and $113. I note long-term resistance at $130 in May, so there is considerable supply of bearish positions in the rally attempt.

MMM: Stock rejected at 200-day moving average

the bottom line

I reiterate my Basic Buy rating on MMM. I think valuations are still good, but technical price action has not turned out to be as favorable as I had initially hoped. If we get it, get ready to buy on a move up to $80, as that could offer a better risk/reward opportunity for this high free cash flow industrial sector stock, and long-term investors should benefit from its high yield, Free cash flow while holding 3M, and depressed valuation.