The bad news is all around, and the media surely amplifies the effects of anything 'bearish' it can get its hands on. With layoffs in the tech sector from companies like Meta Platforms (NASDAQ: META) and Amazon.com (NASDAQ: AMZN) in the past quarter, and others like Goldman Sachs Group (NYSE: GS) sounding alarm bells with raised probabilities of a recession spooking investors and markets all around.
Despite 3M (NYSE: MMM) joining the party back in January when it announced 2,500 jobs on the 'kill list' and an additional 6,000 roles in its latest investor presentation as it reported first-quarter 2023 earnings earlier today, there are still a lot of signs for investors who are in - or thinking about getting in - the stock which signifies the bottom is priced in. So it could be smooth sailing from here on.
A Shareholder's Perspective
3M dividend yield is sitting at an all-time high of nearly 6%, and having experienced year-on-year growth in free cash flow of 36% suggests no threat of decreasing the payouts to shareholders. However, starting with this simple measurement, the stock could be suffering from undervaluation, and it gives markets reasons to dig further. Yes, the company saw a 9% revenue decline annually amid the faltering demand for consumer electronics, followed by a decrease in disposable respirator demand as the peak effects of the COVID-19 pandemic resided.
Declining demand coupled with rising input costs also sent the operating margin for the business down to 15.5% from 18.6% a year prior, which directly translated to a 22% decline in earnings per share posted at $1.76 for the first quarter.
What more reason could management have to implement their restructuring initiative, which according to them, will translate to $700 to $900 million increases in operating income and allow simplifications of internal supply chains and other streamlining capabilities? As inflation is effectively being brought down by the FED efforts to raise interest rates, all business segments within 3M saw contractions from industrial (-6%) to transportation (-11.3%) and consumer (-6.8%). These are negative news today, but investors can see this as a bottoming in the grand scheme since these segments are bound to recover in volumes and activity. Industrial can see the benefits of a reviving construction sector, transportation will inevitably benefit from the normalization of today's wild car market, and consumers will ride tailwinds once inventory levels in the retail space start making sense.
Once restructuring plans are in effect and the economic gains are reflected in the business, management's guidance can become a reality for investors. For example, pointing to an organic sales decline of 3% may be conservative once markets start to pick up in volume and activity, however taking that decline to heart means that earnings per share would reflect $8.00-$9.00, implying a 10-20% decline from 2022 according to 3M financials.
Buy From Pessimists
20% declines in EPS, no thanks. Shares of 3M pulled back as much as 23% in the first quarter, given the expectation of compressing margins and even lower results for the full year; however, this panic may be an opportunity for those investors that realize the following.
The $100-$105 range not only represents a solid weekly support for the stock but is also where 3M traded back in 2011 when the business fundamentals were a fraction of what they are today. Given that the company routinely generates ROIC (returns on invested capital) in the range of 14-17%, it would be a no-brainer to consider exposure to the value creation discrepancy. Secondly, as mentioned, the all-time high dividend yield may suggest that the stock is undervalued, supported by its 10x price-to-earnings ratio, the lowest since the 2008 financial crisis.
One last thing to consider is that turning a nearly $60 billion company is not easy, so cash balances rose to $3.8 billion, and debt components declined from 57% of total capital in 2022 to 52.7% of total capital in the first quarter. Management is planning on increasing efficiencies and digging into higher-growth spaces following their cost-reduction restructuring efforts, which is why liquidity as a form of flexibility is coming to light.
3M analyst rating points to a consensus price target of $126.77, implying a 14-15x P/E multiple. Historically 3M has carried an 18-19x multiple, so perhaps these targets are cautiously awaiting the results of restructuring efforts. Nonetheless, today's prices are more attractive for those looking for value.
