Although the legal ramifications of 3M's production of perfluoroalkyl substances (PFAS) are unclear, the risks have been mitigated by settlements and the Solventum spinoff. The company is a materials science company that produces cutting-edge products like ceramic composites for aircraft engines, traffic signs, overhead projectors, and electronic displays using microreplication technology. Because 3M's technology is hard to copy and its proprietary secrets are tightly guarded, its prices are 10% to 30% higher than those of the competition. In addition to providing economies of scope, 3M's ability to adapt its technology into a variety of use cases lowers overall unit costs and boosts gross margins. With modest margin expansion primarily from operating leverage, 3M can grow its organic top line by 2% to 3% annually after the Solventum spinoff. Although 3M has some growth initiatives, especially in automotive electrification, the company's intrinsic value has been diminished during the tenure of its previous CEO, Mike Roman. Other key industries, like home filtration products and personal safety gear, ought to keep expanding in line with GDP.
3M Co: A company with a sound balance sheet, and mixed shareholder distributions.
3M Co: A company with a sound balance sheet, and mixed shareholder distributions.
3M Co: A company with a sound balance sheet, and mixed shareholder distributions.
3M Co: A company with a sound balance sheet, and mixed shareholder distributions.
Why Gurus Like 3M Least
It is profoundly baffling that none of the top Gurus an exposure of even a percentage in 3M. Additionally the gurus who have the most exposure are traditional long/short hedge funds, who often times focus on the catalyst present in the immediate future.Often times these kind of hedge funds engage in sophisticated derivative trades which mandates them take a position in a stock to fully execute the trade. One possible explanation, apart from the legal battles, why deep value investors like Bill Ackman (Trades, Portfolio), Warren Buffett (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio)t themselves at an arm's length from 3M's stock could be its oblivion status of its cash flow. Over the past five years its free cash flow tanked by 90%. And this coincided with the dip in its dividend payout ratio which is down by 20% over the same period. For value investors, a smooth and organic mobility of cash from between holdings in their portfolio is the cornerstone of their investment philosophy. And for a company as big ( $75 billion market cap) and as matured (123 years old), a 90% dip in free cash flow in the past 5 years is a gigantic red flag for deep value investors.
3M Co: A company with a sound balance sheet, and mixed shareholder distributions.
3M Co: A company with a sound balance sheet, and mixed shareholder distributions.
Investment Upsides
Strong brands like Scotch masking and painter's tape, Filtrete air filters, and Command hanging solutions give 3M's construction and home improvement division a broad moat. With the invention of Scotch masking tape in 1925 and Scotch cellulose tape five years later, these brands have a lengthy history. 3M uses its adhesive technology in a number of products, including duct tape, hanging clips and hooks, toilet paper holders, drywall picture hangers, and fasteners for mounting tools, securing seat cushions, and holding down tarps.With a broad but eroding moat, the consumer divisionwhich includes office supplies and stationeryearns high profits but is predicted to decline as the world grows more digital. With a 77% global market share for sticky notes, companies like Post-it have a strong hold on consumers' minds. Customers may trade down for less expensive options, but no single product in the consumer segment controls the majority of sales. Slow technological advancements in many of its markets are the reason for 3M's low risk of obsolescence. For instance, only slight, incremental technological advancements have been made during the more than 120 years that 3M's abrasives business has been in operation. Price is a secondary consideration behind factors like product availability, defect rate, and customer support because 3M's non-consumer products make up a small portion of a customer's overall budget but have a high associated cost of failure.
But over the past five years, 3M's organic growth has significantly slowed, forcing it to rely on acquisitions, which have had varying degrees of success. Acquisitions that have fallen short of growth expectations include Capital Safety and Scott Safety, as well as M*Modal, a sizable purchase of what the company considers to be a weakly competitive company. The company may be having trouble passing on rising input costs to customers, which is why the decline in organic growth and declining gross margins are concerning. Many of 3M's products have been surpassed by rivals, who have gradually eroded its market share. Quantitative returns have also demonstrated competitive disruption, with peers' excess margins decreasing. Declining excess returns on capital are a result of 3M's large acquisitions and waning earning power. The remaining liabilities of 3M, including property damage, environmental, personal injury, and non-US-based damages, come to about $10 billion in the worst-case scenario. 3M would still easily surpass its hurdle rate and generate low-double-digit returns in such a scenario. In the worst-case situation, though, 3M's legal obligations might outweigh its assessment of the company's equity worth.
Due to its cost advantage and intangible assets, 3M's transportation safety division, which is well-known for producing reflective road signage, has a narrow moat. The division's products are essential to maintaining driver safety, and 3M's size and pooled technology help to sustain its technological superiority and cost advantage. The division's products divert attention from price by saving customers more money than the product itself costs. According to a 2016 study by the US Department of Transportation, for every $1 invested in a sign upgrade program, $53 in lower crash costs were saved.Compared to the safety and industrial segment, which has historically produced high-teens returns on invested capital, the transportation and electronics segment sells a larger percentage of its products directly to consumers. With an average return on invested capital in the mid to high 20s, 3M's consumer segment is the company's only wide-moat segment and yields the highest returns. Because of its powerful brands and cost advantage from economies of scale and scope, the home, health, and auto care division deserves a wide moat rating. Another benefit for leading consumer brands is that they continue to dominate both digital and physical retail shelf space.
Intrinsic Valuation
3M Co: A company with a sound balance sheet, and mixed shareholder distributions.
Based on the time value of money and a positive assessment of 3M's long-term margin and revenue growth prospects, the company's intrinsic value stands at $93.82 per share making it significantly overvalued. In comparison to its peers in the US multi-industrial category, the company is valued at 13 times 2025 adjusted EPS, which represents a substantial discount. The contradiction could be explained by the stagnant free cashflow generated by 3M past few years. This was primarily due to the increased Capex investments and unchanged dividend payouts past few years which has hurt their free cash flow generation. And the GF valuation puts a great weightage to free cash flow generation, as it should. However, the consistently improving operating margin makes a strong argument why 3M's stock trades at such a low P/E. Over the long run, 3M's top line is anticipated to grow organically by 2%3% due to share buybacks, operating leverage margin improvements, and efficiency gains.3M is confident in its liquidity position to fund its dividend and no longer needs to take on additional debt, despite the company's unimpressive growth profile and legal uncertainties. The company broke its 64-year dividend growth streak to pay for its legal settlements, and in the worst-case scenario, it is expected to face nearly $10 billion more in PFAS-related legal liabilities.As the company continues to reduce its portfolio, 3M's more confident investments, like automotive electrification, should pay off. It is anticipated that the company's core businessespersonal protective equipment (PPE), industrial adhesives, automotive, and home improvement productswill continue to contribute and, in their opinion, grow more quickly than the GDP. Growing employee health and safety laws as well as increased manufacturing and construction activity in developing nations are driving the PPE market.
Investment Downsides
Because of the uncertainty surrounding potential future litigation pertaining to PFAS, a group of approximately 15,000 chemicals, 3M has been assigned a Very High Uncertainty Rating. More than 98% of Americans' blood and the water supplies in the US and Europe contain PFAS. Even though 3M intends to stop producing PFAS by 2025, it might continue to use PFAS-containing supplies after that year. Personal injuries, which could be substantial given the link between PFAS and high cholesterol, thyroid disorders, childhood developmental problems, and an elevated risk of cancer, are not taken into consideration in current settlements. According to a study by Obsekov, Kahn, and Trasande, the annual health costs in the US alone linked to PFAS exposure have an upper bound of $62.6 billion and a lower bound of $5.5 billion. Although estimating 3M's legal risks is extremely uncertain, both of the current settlements can be absorbed by the balance sheet. Since 1970, 3M has developed a risky practice of stifling negative research, which calls into question the company's culture and possible hidden hazards.
Portfolio Management
Over the past 20 years, 3M's R&D expenditures have stayed consistent at about 6% of sales, but the company's return on investment has fluctuated. 3M continues to prioritize above-average spending on product innovation, as evidenced by peer R&D spending, which averages about 3.5% of sales. The business has occasionally made acquisitions with subpar outcomes, but it could do better by taking advantage of the fragmented nature of many markets. Since 3M's healthcare division had the lowest return on investment and the fewest manufacturing synergies with other divisions, it was a smart decision to spin it off. In an effort to improve operational efficiency, the company has also taken a variety of actions, such as mass layoffs and a reduction in the footprint of its corporate and manufacturing buildings. The fair value estimate has decreased as a result of 3M's 1.8% annual share count reduction over the past 20 years. Because end markets are mature and there are significant legal uncertainties, 3M's revised dividend payout ratio of about 40% is appropriate. With 3M's remaining 20% stake and a $7.7 billion "midnight" dividend from Solventum, 3M should have enough cash on hand to cover its legal obligations and pay its updated dividend.
