MMM shares have been facing some downward pressure since the company released its quarterly results for the first three months of 2020. The American conglomerate reported a deceleration in its Asia and EMEA sales along with the withdrawal of its earnings guidance for the year, citing significant volatility in sales and operational stability.
Meanwhile, this revenue downturn accelerated during April, according to the company’s quarterly presentation, reflected in a 20 per cent drop in sales in the Americas and a 15 per cent reduction in its Europe, Middle East and African division revenues. This behaviour was in line with the company’s predictions of an even sharper drop during the remaining months of the second quarter.
So, if you are wondering why is 3M stock dropping, the answer is: declining revenues on key markets and significant uncertainty about the company’s future performance.
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3M stock news
3M has embarked on significant efforts to further expand its capacity to manufacture N95 respirators to assist health care professionals and patients in preventing contagions.
According to recent reports, the company has been awarded two contracts from the US Department of Defense to ramp up its monthly output to 95 million units per month, up from 35 million it produced before.
Overall, the company reportedly expanded its manufacturing capacity for respirators up to 1.1 billion units per year, trying to cope with increasing demand as virus cases surpass the four million mark globally.
On a side note, the US administration tried to halt respirator exports from 3M to other countries in an effort to prioritise the country’s demand over others. 3M responded that it would not comply with such orders. Instead, it decided to increase its domestic capacity to deal with this surge in local demand.
3M stock analysis
3M stock performance so far this year has been a bit disappointing. 3M shares have lost nearly 8 per cent since the quarterly results were published and they have slid 16 per cent so far this year as a result of the coronavirus sell-off that took place in February. The stock is also trading 17.7 per cent below its 2020 peak of $177.78 back in late January.
Furthermore, the stock is trading near its 50 DMA and could possibly go under if some more bearish pressure starts moving towards it. Exactly on April 28, the day the quarterly report was released, the stock was about to break its 200 DMA but retreated after the news. It is now trading 8.7 per cent below that mark.
Meanwhile, MMM shares are offering a 4 per cent dividend yield and they are currently trading at a trailing P/E of 17. At their current price of $146, the stock is almost half-way between its 52-week highs and lows of $118 and $181.
3M share price forecast
Now, let’s drill down into the company’s fundamentals to draft a comprehensive 3M share price forecast.
As for revenues, the second quarter is expected to be the worst for the multinational corporation, considering a significant deceleration in the global economy, especially in Europe and the US, as the number of coronavirus cases there are still moving upward.
There are signs of recovery in China as a result of lower rates of contagion in China, Japan, and South Korea, even though a second wave of the virus could turn these positive expectations upside down.
Analysts are expecting sales to drop 12 per cent YoY by the end of the second quarter while anticipating a moderate recovery for the final two quarters of the year.
Meanwhile, annual sales are expected to slide by 4.2 per cent as long as these two last quarters achieve their expected upward contribution to the target.
As for earnings, analysts are estimating a 21 per cent drop in 3M’s EPS for the next quarter, compared to the previous quarter, to close the 3-month period at $1.75 per share. That would result in a 9 per cent year-on-year drop, which in my view is fairly conservative for what could be one of the deepest global economic slowdowns in the last century.
Following these estimates, annual EPS are expected to come in at $8.04 by the end of the year, 3 per cent more than what the company earned last year.
We would classify these estimations as fairly optimistic, after considering the significant deceleration that the US and Europe’s economies are facing right now. Additionally, a second Covid wave could dramatically harm the result of the third quarter, which would end up affecting the company’s annual bottom line much more than expected.
On the other hand, the company showed some improvement in its top-line and bottom-line profitability margins due to an increase in productivity, which could cushion the impact of lower sales down the line.
On a more conservative valuation approach, we could estimate annual EPS to come in at $7.6 - $7.7 by the end of the year, which would result in a forward P/E ratio of 19 at today’s prices.
3M share price forecast: Buy or Sell?
Historically, MMM shares have traded at P/E levels above 20 and as high as 26 during more stable global economic environments, which means that while the stock is not necessarily “cheap”, its valuation metrics indicate that it is being valued at a fairly conservative level based on its past record. Additionally, the company is financially stable and has a strong position to withstand this economic turmoil while it lasts.
With that in mind, I can see the 3M ending up the year between $152 and $200 if economic conditions improve on Q3 and Q4 and valuation reacts positively.
That would result in 4 to 32 per cent gains by the end of the year for those willing to hold on to MMM stocks while the company surfs through this unprecedented crisis.
The lower end of this estimate is fairly in line with the average price target of $158 from 19 analysts surveyed by financial data provider Koyfin. From those, four are rating MMM stock as a buy, while nearly 12 are rating the stock as a hold.
It seems that there’s enough upside potential for holding on to the stock, especially if countries manage to effectively reopen their economies, at least partially, and manufacturing activities recoup.
Additionally, 3M is advantageously positioned in the safety, industrial and transportation markets, all of which could provide significant benefits for the company if 3M manages to provide advanced technologies that aim to contain another pandemic-level virus spread.
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