After years of underperformance, 3M(NYSE: MMM) stock delivered a respectable performance to investors in 2024 -- gaining some 17%. But what will 2025 bring? And more importantly, what is the best way for investors to monitor progress at 3M?
No one, least of all CEO Bill Brown, believes 3M is a quick-fix situation. Still, Brown's restructuring plan alerts investors to some significant actions and key operational metrics to monitor, that may ultimately improve the company's headline numbers over time.
3M in 2025
Before going into detail, it's worth noting that 3M has an investor day planned for Feb. 26, during which Brown will discuss 3M's plans and guidance in more detail. That said, he's been candid and forthright about the improvements necessary at 3M. The changes are led by a couple of key priorities as laid out by Brown:
Improving organic revenue growth by "reinvigorating innovation and improving commercial excellence"
Improving operational excellence
Organic revenue growth: Look for NPI growth
These plans will take time to come to fruition, not least as a key part of the plan, and one that strikes at the heart of how 3M lost its way over the last decade is to increase its new product introductions (NPI). Unfortunately, it will take a while to improve NPIs fundamentally, but 3M is taking piecemeal actions to improve NPIs over the near term.
For example, Brown outlined how he's shifted 100 people in research and development (r&d) to work on NPI. In addition, 3M is fast-tracking "low-risk product line extensions" and cutting the time it took to introduce a new stockkeeping unit (SKU) from 100 days in 2023 to 60 days in 2024. As such, NPIs are expected to increase by 10% in 2024, with NPI growth expected to accelerate in 2025.
The company was known for investing in research and development to produce differentiated products that command pricing power and grow market share. The growth in sales then fuels margin expansion as volumes increase, and 3M benefits from its global scale. In addition, NPI products tend to come with increased pricing power. Putting all of this together, it's clear that NPI growth is not only a revenue growth opportunity; it's a margin growth opportunity.
Image source: Getty Images.
Operational excellence: Look for improved gross profit margins
A key part of Brown's plans for 3M includes generating productivity improvements by revamping its supply chain by reducing complexity, improving the quality of its supplies, and lowering costs. As such, he's aiming for a 2% productivity increase, translating to $260 million worth of its roughly $13 billion in cost of goods sold (COGS).
Another way 3M can improve its profit margins (in this case, operating profit margins) is by improving operating efficiency. The good news is that Brown's excellent commentary tangentially touched on an issue of significant investor concern over the last decade.
Bluntly put, 3M's previous management did not have a great record of meeting its guidance. That's an issue for investors who are putting money to work based on what management is telling them, and it's also an operational issue for 3M, given that the business is being structured assuming X sales when, in reality, it's X-Y sales. On a granular level, Brown candidly admitted that "our forecast accuracy is not very good," which is part of why 3M's major operating equipment is running at a lowly 50% utilization.
If equipment isn't utilized effectively, products won't be delivered as timely as possible, and 3M will have to tie up cash-holding inventory. Consequently, in late October, Brown noted that 3M "kicked off a project to redesign our forecasting process, and we're in the early stages of a 15-week sprint to test and tune our demand plan for two large divisions using different analytical tools."
Image source: Getty Images.
As such, the forecasting redesign results should be known before 3M holds its investor day. Management will surely discuss the matter in its forthcoming fourth-quarter earnings report. Improving operating equipment efficiency (OEE) will improve operating costs, cash flow, and 3M's relationship with suppliers and distributors.
A stock to buy for 2025?
The self-help opportunity is significant at 3M in 2025, and while it will take time to see the full benefits of investment in NPI development, investors should see some near-term improvement. Similarly, improving supply chain productivity and OEE won't happen overnight. Still, if Brown can demonstrate that 3M is on the right path, then 3M could be heading toward significant value creation even in an environment of low single-digit organic sales growth.
All told, 3M is an excellent stock to consider for value investors in 2025, not least because it's a self-help story with a management team that has a game plan to generate value for shareholders.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends 3M. The Motley Fool has a disclosure policy.
