At a glance, it's understandable that 3M's (NYSE: MMM) recent investor day didn't produce a significant move in the stock price. The industrial conglomerate's three-year targets were solid enough but not sufficiently inspiring to encourage investors to significantly upgrade medium-term expectations.
However, based on the presentations, there's a strong case for 3M being able to deliver good returns in the coming years, with more to come over the long term. That's likely to suit many investors, and it's why the stock remains attractive to buy. Here's the lowdown.
3M's financial targets
The financial targets laid out by management at the event are shown in the table below. Prospects for earnings growth are clearly coming not from organic sales but from expectations for higher margins, with management aiming to hit a 25% operating margin by 2027.
Here's some quick math to make sense of what this table means for potential returns. If we pencil in the midpoint of 2025 guidance ($7.75) and assume 8% growth in 2026 and 2027 -- that's the midpoint of the 7% to 9% range usually defined as "high single digits" -- we get earnings per share of $9.04 in 2027. If we assume the stock trades at 20 times earnings, around the historical norm, it would reach $181 in 2027, resulting in a 6.4% annual return based on recent prices. Including a 2% dividend yield would mean an 8.4% yearly return.
That outcome would provide a solid enough return but not a particularly exciting one. That said, there is a pathway to a better return for investors.
3M Guidance
2024
2025 Est.
2026/2027 Est.
Organic sales growth
1.2%
2%-3%
"outperform macro"
Operating margin
21.4%
130 bp* to 190 bp expansion
~100bps annually
Earnings per share
$7.30
$7.60-$7.90
High-single-digit annual growth
Free cash flow
$4.9 billion
~100% conversion from net income
>100% conversion from net income
Data source: 3M presentations, *bp is basis points, where 100bp=1%
How 3M can generate super returns for investors
In a nutshell, the upside opportunity comes from the potential for 3M to realize CEO Bill Brown's aim of revitalizing its new product introductions (NPIs). Doing so will likely lead to a pick-up in sales growth and margin expansion over the long term. As such, by 2027, investors in 3M could be pricing in better earnings growth in the future.
NPIs tend to be differentiated products that command pricing power, and 3M can ramp up volume production as they gain in popularity, resulting in sales growth and margin expansion. Given the gestation period necessary to fundamentally change a research and development function, develop NPIs, and establish them in the market, it won't be an overnight process.
Image source: Getty Images.
Still, there's plenty of room for improvement at 3M, and investors have cause for optimism. For example, management disclosed that its five-year NPI sales was $7 billion in 2018, but that figure slumped to just $2.4 billion in 2024 due to a dearth of NPI.
The slump in NPIs meant 3M's New Product Vitality Index (NPVI) (representing the share of total company sales from NPI over the last five years) slumped to just 10% in 2024 (compared to figures of 33% a decade ago). Management plans to get its NPVI to about 20% in 2027 through focused investment and implementing process improvements that should reduce its time to market for NPI.
Why 3M can improve NPI
It was refreshing to hear chief technology officer John Banovetz openly outline why 3M's NPI had fallen behind in recent years. The good news is that all three reasons are likely to prove temporary.
3M had cut back on local product development
3M was focused on reengineering products in light of the removal of PFAS compounds in its products and the need to adjust to the supply chain crisis caused by the lockdowns
Management had overinvested time and money in the healthcare business, now spun off as Solventum
These are entirely plausible arguments and issues likely to have caused disruptions, and given management's commitment to reinvigorating research and development, working through the PFAS-induced changes, and the absence of the healthcare business, 3M has an opportunity to improve NPIs.
Image source: Getty Images.
A stock to buy
If 3M can generate the operational improvements necessary to improve long-term margin and NPIs, the market could start pricing in improved long-term growth prospects. The back-of-the-envelope figure of a yearly total return of 8.4% calculated above has upside potential. That might suit many investors looking for a relatively safe way to invest in the industrial sector.
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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 recommends Solventum. The Motley Fool has a disclosure policy.
