When does 3M’s stumble become a buy?

Key Points

• Shares had been trending up since last October’s low, gaining 30%. 
• This week’s earnings report has undone much of that hard work, but there remains upside potential. 
• If shares can consolidate in the coming weeks, the bulls will likely want to take charge again. 

Having put in what looked like a bottom last October, investors in 3M Co NYSE: MMM would have been looking ahead to 2024 with bullish optimism. Sure, the stock had sunk 60% since the summer of 2021, but with equities back in favor, 3M shares finished 2023 with a decent 30% rally. They’d also been upgraded by the team at Barclays, who felt the downcycle was complete and that the company’s margins were all set to once again expand. 

We’re less than a month into the new year, however, and all that optimism has already come undone. The Minnesota-based conglomerate reported its Q4 earnings earlier this week, and they were well off the mark. 

Weak earnings

When a stock is trying to convince the market that it’s decisively ended a downtrend and is ready to start an uptrend, and especially when the market is starting to buy into this turnaround, strong earnings results become absolutely essential. Wall Street wants to see the company beating analyst expectations and blowing the roof off with strong forward guidance; anything short of that is going to raise eyebrows. 

Unfortunately for 3M, they missed analyst expectations for both their earnings and revenue numbers, while management’s forward guidance for the year ahead was well below the consensus. To compound matters, 3M’s net sales dipped quarter on quarter across every one of the company’s segments, which itself played no small role in the stock’s subsequent plunge. 

3M shares gapped down more than 6% on Tuesday’s open and kept falling. Yesterday was no better, with another 3% dip taking the stock 13% below its pre-earnings level. All in all, not a great look. However, for those of us watching on from the sidelines, is there an opportunity still to be found here? And if so, at what point does 3M dip turn into a buying opportunity? 

Bullish factors

First things first, let’s consider the factors a potential buyer might get excited about. 3M offers a decent dividend yield of 6.4%, which is 400% higher than the sector median of 1.5%. On this point, it can offer investors an incredibly strong track record of dividend growth, with 100 years of dividend history and 65 years of consecutive dividend growth. Valuation-wise, it also rates highly against its peers. Taking its non-GAAP earnings into account for a price-to-earnings (PE) ratio, 3M’s is only 10 versus the sector median of 18. 

So, already, with a rock-solid dividend and tempting valuation comparables, we can see some bright spots emerging on the side of the bulls. Where 3M struggles, though, is with its profitability. Several key metrics, such as EBITDA, revenue per share, and operating income, are trending in a completely wrong direction compared to what’s needed to justify an uptrend in the stock. 

Considering a position

However, there are some reasons to be optimistic on this front. After two horrible prints from the middle quarters of last year, 3M’s net income swung into black ink for Q4. A renewed focus on margins and cash flow, along with the restructuring of their supply chain, was highlighted by management as a reason to be optimistic. These are things the bulls can grab onto, but a lot more of this will be needed in the next report to get a rally going truly. In the near term, litigation concerns over certain product issues are also sure to weigh the stock down, but at some point, you have to think the worst-case scenario is fully priced into the stock. 

3M shares are back trading at levels they first hit twenty years ago. But as Barclays noted in their upgrade on the stock last month, “3M is still a high-quality business with a wide economic moat”. Their price target of $107 is becoming all the more appealing with this week’s drop and currently points to a targeted upside of at least 14% from current levels. 

The fall-out from this week’s update is likely going to take another week or two to play out fully, and shares are looking like they want to at least test last year’s low around $85. It’s worth watching to see if they can hold that level and consolidate into February. If so, the turnaround potential might once again become appealing enough to draw in the optimists and believers for another recovery rally.