Stock Analysis & Ideas

3M Stock (NYSE:MMM): Investors Should Focus on Q3’s Bright Spots

Story Highlights

3M’s third-quarter profit doubled year-over-year as the manufacturing giant slimmed down and fought an uphill battle against high inflation. Yet, investors gave 3M a ho-hum response – which they may come to regret if MMM stock gets a delayed post-earnings rally.

The 3M Company (NYSE: MMM), being a manufacturing business, has been at the receiving end of a punishing year due to supply-chain constraints and elevated consumer prices. The company performed surprisingly well during its most recently reported quarter, so I am bullish on 3M stock despite the market’s unenthused response.

Headquartered in ice-cold Minnesota, 3M is a redoubtable manufacturing giant. The company’s technology products run the gamut from electrical, ceramics, packing, and health/protective gear to stationery products and air-quality solutions. Indeed, chances are pretty good that if you’re in the U.S. somewhere right now, you’re using a product that 3M helped to create.

Yet, sometimes financial traders don’t give 3M its due respect. Short-term thinking can cloud people’s judgment and prompt them to over-focus on negative results, which might actually be positive given the challenging circumstances in 2022. In time, however, investors should come to appreciate 3M’s resilience despite the obstacles – and if/when they do, MMM stock could catch a substantial, overdue bid.

3M Made a Smart Move in Trimming Its Operations

Sometimes in the business world, bigger isn’t always better. There are occasions when it makes sense to divest or spin off operational units when they aren’t a necessary part of a company’s core business. Clearly, 3M’s executives understand this principle as they applied it strategically during 2022’s third quarter.

Commenting on 3M’s Q3 performance, Chairman and CEO Mike Roman pointed out that his company divested its Food Safety business during the quarter. Additionally, 3M “began executing the work-streams” to spin off its healthcare unit, “resulting in two world-class, public companies.”

It may be too early to determine whether these moves to slim 3M down will enhance the company’s value to the shareholders. At the very least, however, we can cite some data points that suggest 3M is heading in the right direction.

The company’s adjusted earnings per share (EPS), excluding the impact of special items, came to $2.69 in the third quarter of 2022. This result outperformed the $2.58 posted in the year-earlier quarter as well as the $2.60 that analysts on Wall Street had anticipated.

Bear in mind that 3M achieved this profit result in the face of what Roman justifiably called a “highly-uncertain” macroeconomic environment. It’s commendable, really, that a manufacturing business could manage to turn an expectation-beating profit “amidst macroeconomic challenges and the strengthening U.S. dollar,” as the CEO put it.

So, maybe the time is right for 3M to become a leaner business and continue on its path of bottom-line growth. Yet, as we’ll discover in a moment, not everyone is bullish on MMM stock despite the company’s potent profits.

A Mild Revenue Miss Caused Traders to Miss the Big Picture

Sensible investors can’t afford to wear rose-colored glasses in the 2020s. If a company like 3M posted mixed results, we must acknowledge the good, the bad, and even the ugly data points. In this instance, the ugly points pertain to 3M’s third-quarter revenue – which, in actuality, wasn’t all that bad.

Here’s the rundown. Analysts had modeled $8.71 billion in revenue for 3M during 2022’s third quarter, but the company delivered $8.62 billion. This result, moreover, indicated a backslide compared to 3M’s revenue of $8.94 billion from the year-earlier quarter.

Again, we should put this into perspective and never lose sight of the bigger picture. Roman was right to cite the strong U.S. dollar, which has made it more expensive to make interest payments on loans this year. Plus, let’s not ignore the “macroeconomic challenges” that Roman referenced, which presumably would include trade tensions with China, conflicts with Russia, and a persistently-high U.S. Consumer Price Index.

Despite these extenuating circumstances, financial traders nonetheless chose to push the MMM stock price into the red after 3M released its third-quarter report. It just goes to show that sometimes, traders can behave like spoiled brats – but this only provides an opportunity for mature, forward-thinking investors.

After all, look at the good price you’d be getting if you took a position in 3M now. The company’s trailing 12-month P/E ratio is quite reasonable at 16.5x. Furthermore, as an added bonus, 3M pays a generous forward annual dividend yield of 5.1%.

Is MMM Stock a Buy, According to Analysts?

Turning to Wall Street, MMM stock is a Moderate Sell based on eight Holds and five Sell ratings. The average 3M price target is $126.77, implying 7.56% upside potential.

Conclusion: Should You Consider 3M Stock?

Apparently, some short-term traders can’t see past the harsh circumstances that 3M overcame to achieve its impressive third-quarter profit growth. They might not appreciate 3M’s smart strategy to trim down its business and, in so doing, overcome multiple challenges that are out of 3M’s control.

On top of all that, the skeptics and sellers are missing out on a terrific bargain and a dividend reinvestment opportunity with MMM stock. All in all, 3M delivered great results, and investors ought to seriously consider starting a long-term position before the market comes back to its senses.

Disclosure

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