3M Surprises and Rebound Accelerates: It Isn’t Too Late To Get In

Key Points

• 3M had a surprisingly good rally, catalyzing its market to set new highs. 
• Analysts' support is solid; a shift in sentiment suggests this stock could rally for several quarters.
• Profitability, improving cash flow, and balance sheet health have 3M back on track for distribution increases. 

3M’s NYSE: MMM rebound is gaining momentum because of surprisingly good results. Today’s story is that repositioning efforts are taking hold and driving improved profitability while litigation risks dwindle. The takeaways from the Q2 report include better-than-expected top and bottom-line results, organic sequential growth in all segments, improved margin, and increased guidance that affirms the shift in analysts' sentiment. That shift points to higher share prices and the potential for a sustained rally that could last several quarters. 

Analysts have yet to revise their estimates and targets based on the Q2 results but will likely increase them because the trend leading into the report is bullish. It includes numerous upgrades and price target revisions that are leading the market higher, lifting the sentiment to Moderate Buy from Hold and the price target by 10% in the last ninety days. 

The most recent targets have the stock trading between $110 and $140, which puts consensus near $125 and more than 10% above the post-release price action. Post-release price action is bullish, taking the stock up more than 5% to set a fresh multi-year high. Because the move breaks resistance at a critical level, a complete technical reversal is in play; this stock could trend higher for the next four to six quarters, possibly rising 60% to 70% to reclaim the $170 level. 

3M’s New CEO is Already Paying Off for Investors

3M got a new CEO as part of its restructuring efforts, which is already paying off. The company contracted slightly compared to last year, about 0.5%, but primarily due to the spin-off of the medical unit earlier this year. The organic, ongoing business is the significant detail today, growing contrary to expectations. The company reported $6 billion in adjusted revenue, up 1.1% compared to last year, outpacing the consensus estimate by 290 basis points. The strength is due to organic growth in all segments aided by pricing actions to offset inflation. 

Another area of strength is margin. The company widened its GAAP and adjusted operating margins due to improved cost structures, internal efficiencies, and the declining impact of litigation costs. The salient details are that GAAP earnings from continuing operations are up 100%, while adjusted EPS from continuing operations is up 39%. Adjusted earnings outpaced the Marketbeat.com consensus estimate by $0.25, and cash flow was robust. 

The catalyst for higher share prices was the guidance. The strength in earnings led management to improve its guidance by raising the low end of the EPS target range. 3M now expects full-year earnings to range from $7.00 to $7.30, a range whose midpoint exceeds market expectations. Another increase may come next quarter. 

3M Is Back On Track for Distribution Increases

3M recently cut its dividend payout to preserve capital and aid the turnaround but is already back on track for distribution growth. The current payout is $2.80 annually and $.70 quarterly, with a 65% free cash flow payout ratio in Q2, including repurchases, which leaves room for accelerated returns. The dividend is attractive as it is, yielding about 2.75%, with shares in the lower portion of a trading range and reliable. However, the earnings outlook, cash flow, and balance sheet suggest that increases will come soon. Accelerating capital return will be a catalyst for higher share prices. 

The balance sheet highlights include a reduction in shareholder equity, but this is due to Solventum's NYSE: SOLV spinoff. The offsetting factors are the cash-flow positive quarter, a doubling of cash reserves, and debt reduction. Leverage remains low, below 3X equity, and should improve as the year progresses, improving the outlook for distribution increases. 

The repurchases were slowed in 2023 due to pending litigation but are ramping higher. Repurchases failed to offset dilutive actions on a YOY basis but have reduced the count sequentially and are expected to continue.

3M Breaks Resistance: Opens Door for a Sustained Rally 

3M’s price action is significant because it broke critical resistance. Critical resistance is near $105 and consistent with lows set in 2020 and a support break in 2022/2023. The takeaway is that this market is now above the baseline of a Head & Shoulders reversal that could quickly add another $30 to the stock price. Critical support is now at $105; a move to retest that level should result in a solid buy signal, but there is risk. A move below $105 could keep this stock range bound for the foreseeable future.