3M is one of the weaker components in the Dow Jones Industrial Average, down about 7% year to date, excluding dividends, trailing far behind comparable gains of the broader U.S. stock market. Two issue have plagued the company in 2019: one economic and the other environmental.
First, the economy. 3M (ticker: MMM) does a lot of business in China. The company also has a big automotive and electronics franchise. All three have been hit in 2019 by either the U.S.-China trade war or by the slowing global economy. Car sales, for instance, are down year over year in China, the U.S., and Europe.
And the weak environment caused some significant volatility around quarterly earnings. 3M financial guidance disappointed the Street a couple of times in 2019 and shares dropped about 13% and 4%, respectively, after reporting first and third quarter numbers.
The second issue facing the company is about the environment and chemical cleanup. 3M and others, including companies such as Chemours (CC), are working through lawsuits tied to a group of chemicals known as PFAS produced long ago.
PFAS, short for per- and polyfluoroalkyl substances, were manufactured in the U.S. from the 1940s to the turn of the century and can harm people’s health, according to the Environmental Protection Agency. States and municipalities are cleaning up sites involved in the manufacturing of the chemicals, while governments are pursuing liability suits seeking money from producers.
3M took a $235 million charge for litigation in the first quarter for PFAS-related litigation. That charge, however, didn’t include personal injury lawsuits. Now Wall Street isn’t sure how to quantify the total liability.
Gordon Haskett analyst John Inch wrote that the industry could face costs ranging from as low as $25 billion to as much as $40 billion. That’s a wide range and the numbers are large. The companies involved in PFAS manufacturing have an aggregate market value of about $180 billion.
Wall Street hates uncertainty. The environmental overhang is a big reason only about 5% of analysts covering the company rate shares the equivalent of Buy. The average Buy rating-ratio for stocks in the Dow is about 55%.
A trade deal appears likely, so things might improve in 2020. A bearish analyst Stephen Tusa from J.P. Morgan is feeling a little less bearish about 3M these days. He upgraded shares from the equivalent of Sell to Hold Monday.
A trade deal appears likely, so things might improve in 2020. A bearish analyst Stephen Tusa from J.P. Morgan is feeling a little less bearish about 3M these days. He upgraded shares from the equivalent of Sell to Hold Monday.
Still, Tusa’s price target is $150 per share, roughly $25 or 15%, below recent levels. His target works out to about 16 times his $9.60 per share 2020 earnings estimate. 3M stock trades for almost 19 times estimated next year’s earnings, a premium to the broader market. Tusa, along with other analysts, want a bigger valuation cushion before investing.
The seven-plus percent drop in 3M stock trails far behind the 22% and 29% respective gains of the Dow and S&P 500. It also trails far behind the 28% gain of Industrial Select Sector SPDR ETF (XLI).
