3M stock forecast: Morgan Stanley buys stake despite group’s lacklustre Q3 earnings
Shares in US-based industrial-consumer conglomerate 3M (MMM) sank following a mixed Q3 earnings report, while forex headwinds and a strong dollar take their toll on stock projections.
3M reported sales of $8.6bn for the third quarter of 2022, which were down 4% year-on-year (YOY), while operating cash flow was down 18% YOY to $1.5bn. However, there was organic sales growth of 2%.
Morgan Stanley has also bought more than four million shares in US conglomerate 3M (MMM), triggering speculation it could potentially become a 3M activist investor. The bank has increased its holding in 3M by 75% during the third quarter of the year, according to data from Nasdaq.
The SEC filing revealed that 4,252,138 shares were bought at a cost of $1,283,271. This puts the number of shares held by the bank up to 9,944,750 and means it’s the sixth largest institutional investor in the business. The announcement came as 3M stock value has struggled this year due to a combination of lower-than-expected revenue and a pending lawsuit.
Formerly known as the Minnesota Mining and Manufacturing Company, the group makes diverse products across four business segments: safety and industrial, transportation and electronics, healthcare, and consumer. Some household 3M brands include Post-It, Scotch-Brite, Scotch, Scotchgard and Command.
Are you interested to learn more about the outlook for the group? Read this 3M stock analysis for the latest news and analysts’ 3M stock price forecasts before making your investment decision.
Q3 earnings report: Mixed results
On 25 October 2022, 3M reported adjusted earnings per share (EPS) of $2.69 in the third quarter, beating analysts’ expectations for the company to earn $2.60 per share, according to figures compiled by Thomson Reuters.
Sales of $8.6bn were down year-over-year, missing the average analyst estimate of $8.70 billion, according to Refinitiv data. Other key financials include:
- Sales of $8.6bn, down 4% year-on-year, which included impacts of negative 1% from divestitures and negative 5% from foreign currency translation due to strength of US dollar.
- Organic sales growth of 2% year-on-year which included a 1.4 percentage point headwind from the decline in disposable respirator demand.
- Operating cash flow was $1.5bn, down 18% year-on-year, while adjusted free cash flow was $1.4bn, down 16% year-on-year.
- 3M returned $1.0bn to shareholders via dividends and share repurchases.
“We continue to execute our strategies and deliver for our customers in a highly uncertain environment,” said 3M chairman and CEO Mike Roman. “Excluding the impact of the decline in disposable respirator sales, our team posted over 3% organic growth. We delivered sequential and year-over-year margin expansion, amidst macroeconomic challenges and the strengthening US dollar.
“We continue to position 3M for the future through investments for growth, productivity and sustainability, along with active portfolio management,” he continued. “This quarter we divested our food safety business and began executing the workstreams to successfully spin [out] our Health Care business, resulting in two world-class, public companies.”
The subdued projections were blamed on a stronger US dollar and the “uncertain macroeconomic environment”.
Earplug business files for bankruptcy
According to a report by The New York Times, on 27 January 2022 the US District Court for the Northern District of Florida ordered 3M to pay $110m in damages to two US army veterans.
The service members claimed they had hearing damage because the combat earplugs supplied by 3M were defective. Following the court judgment there was a sell-off in 3M stocks, leading to a fall in the company’s share price.
3M’s stock-price history showed that the group’s share prices were in downtrend for most of the second half of 2021 despite rising revenue last year.
The falling 3M share price was partly driven by weaker market sentiment for the group, due to the ongoing lawsuits over its earplugs – 3M is still facing claims from over 290,000 former and current military members.
According to Reuters, “Out of the 16 trials to date involving 19 service members, plaintiffs have won in 10, with about $265m in combined awards to 13 plaintiffs.”
Aearo Technologies – the unit that manufactured the earplugs – has begun Chapter 11 proceedings in the Southern District of Indiana, 3M said on 26 July 2022.
The company has also committed $1bn to fund a trust aimed at resolving compensation-related claims, and will provide additional funding if required. 3M booked a pre-tax charge of $1.2bn in Q2 related to the expenses.
The bankruptcy manoeuvre has drawn criticism from the US military members suing the firm.
The action “is further proof that they value their profits and stock price more than the well-being of veterans who fought and served our country,” Bryan Aylstock, the lead plaintiffs’ counsel in a lawsuit against 3M, said in a statement quoted by Bloomberg.
3M to spin off healthcare business
On a separate note, 3M also announced it would spin off its healthcare unit – responsible for close to 25% of the group’s $35.35bn in sales last year – into a separate public company.
The move means 3M will join a number of other manufacturers that intend to split their operations, simplify their businesses and boost investor returns.
UK-based biotech giant GlaxoSmithKline (GSK) recently demerged from its consumer healthcare business, forming a new business called Haleon, which began trading on the London Stock Exchange (LSE) on 18 July.
US industrial icon General Electric (GE) is also splitting its business into three separate parts. The multinational’s healthcare unit, GE Healthcare, will spin out of the broader company in 2023, followed by GE’s aviation and energy businesses in 2024, which will become GE Aerospace. Its power and renewables business will become GE Vernova (the name is a combination of ‘verde’ and ‘nova’, which mean ‘green’ in Spanish and ‘new’ in Latin, respectively).
According to a report from Bloomberg, “A spin-off could boost 3M’s sagging value, bolster its capital allocation strategy and give it a ‘liquidity war chest’.”
Bloomberg Intelligence analysts have suggested that the independent health business could be worth as much as $45bn.
However, some observers, including The Motley Fool’s Lee Samaha, aren’t quite as optimistic regarding the move:
3M will retain a stake of 19.9% in the new firm, which will focus on “wound care, oral care, healthcare IT and biopharma filtration”. The conglomerate expects to complete the spin-off by the end of next year.
Food safety unit to merge with Neogen
Back in September, 3M unveiled details of its $5.3bn scheme to spin off its food safety business, giving some upside to a stock that has trailed the broader market since the start of the year.
Shareholders will have the option to convert 3M shares, which trade on the NYSE, into stakes in the merger with Nasdaq-traded Neogen (NEOG). Following the transaction, Neogen is controlled by 3M.
A separate company, SpinCo, will be created to facilitate the conversion of 3M shares into Neogen shares.
Negative factors
The group is facing falling revenue from declining respirator sales in 2022 as Covid-19 infection rates subside, said Samaha. In addition, 3M did not manage to “fully offset raw material cost increases to contribute to margin growth positively”.
The ongoing lawsuits regarding 3M’s Combat Arms earplugs sold to the US military will continue to weigh on investors’ sentiment.
Investor Reuben Gregg Brewer wrote in The Motley Fool on 21 July:
Brewer believes that the company is a “timely buy amid the market sell-off”.
3M (MMM) stock price targets
According to 3M stock predictions on MarketBeat, 10 out of 13 Wall Street analysts surveyed had a ‘hold’ consensus rating for MMM stock while three maintained a ‘sell’ rating.
The average 12-month MMM stock price target was $132.93. In a positive scenario, analysts forecast the MMM share price could reach $190 while it could also fall to $110 in a negative scenario.
A number of banks updated their targets following 3M’s Q3 report, with Deutsche Bank slightly boosting its target from $126 to $127 on 26 October.
Morgan Stanley’s MMM stock forecast was bearish – the bank set a price target of $110 for the stock on 26 October.
Wells Fargo lowered its price target from $125 to $122 following 3M’s earnings report while maintaining an ‘equal weight’ rating on the stock.
Credit Suisse also posted an optimistic projection, raising its target price to $127 — a potential upside of 3.21%.
3M share price forecasts
Joshua Aguilar, senior analyst at Morningstar, had a fair value estimate of $183 on the stock. In a note, he said the strongest performance of the recent quarter on the top line came from the automotive business division:
“Management communicated low-teens organic sales growth in the automotive aftermarket, though by our maths, foreign-exchange headwinds knocked this contribution down to a positive 8% reported year-on-year sales growth.”
Aguilar said it pointed to “early signs of a return on digital investments” such as RepairStack for connected automotive body shops and thermal barriers in auto electrification.
“RepairStack helps automate a lot of processes in an automotive body shop, like inventory management and invoicing,” he added. “We also like the real-time performance analysis, which may be more appealing for larger customer operations, given the likely up-front cost.”
On the negative side, Aguilar highlighted how personal safety, transportation safety and oral care all faced significant double-digit sales declines on a reported basis. More broadly, he acknowledged that signs of a recession “from this industrial bellwether” had finally started to flow through.
“We like using 3M as a barometer because it’s a short-cycle business. Oral care, for instance, sustained a mid-single-digit organic sales decline off a difficult comparison, due to inflationary pressure impacting discretionary orthodontic procedures.”
Forecast data provider AI Pickup’s MMM stock forecast was bearish in the nearer term, but bullish in the longer term. The forecasting service expects the diversified manufacturing group’s share price to average at a lower $110.70 in 2023 – but $148.66 in 2024. AI Pickup’s 3M stock forecast for 2025 had MMM averaging $206.74 throughout the year.
Algorithm-based forecasting website WalletInvestor’s 3M stock forecast for 2023 was bearish, predicting an average price of $66.24 by the end of the year.
When considering whether to invest in any company’s stock, you should always do your own research, considering the outlook and relevant market conditions. A number of factors dictate whether stock prices rise or fall, including the company’s fundamentals and broader macro-economic factors.
Remember that there are no guarantees and that markets are volatile. You should conduct your own analysis, taking in such things as the environment in which it trades and your risk tolerance, and never invest money that you cannot afford to lose.
FAQs
Is 3M a good stock to buy?
Analysts are mixed on the market outlook for 3M stocks. Although the group reported mediocre earnings in Q3 and plans to spin off its healthcare arm in 2023, the impending lawsuits on its combat earplugs and potential rising litigation costs continue to weigh on investors’ sentiment.
However, whether it is a good buy or not will depend on your investing goals and portfolio composition. You should do your own research and never invest what you cannot afford to lose.
Will 3M stock go up or down?
Views are mixed on the 3M stock price trend. As of 28 November, AI Pickup forecast the share price to fall in the coming years before rising rapidly in 2024, while WalletInvestor expected 3M stock to fall between 2023 and 2027.
You should do your own research and never invest any money you cannot afford to lose.
Should I invest in 3M stock?
As of 28 November 2022, 3M (MMM) stock had lost approximately 30% of its value this year. Your decision to purchase MMM stock should be based on your risk tolerance, portfolio size and goals, and stock market experience.
You should always conduct your research to determine whether a stock is suitable for you. Remember that previous results do not guarantee future returns, and never invest any money that you cannot afford to lose.
