3M Raises Guidance and Changes CEO: Is the Stock a Buy?
Industrial giant 3M (NYSE: MMM) had a remarkable run on Wall Street last week, with its stock soaring by a double-digit percentage thanks to a wave of positive news. This surge in stock value, coupled with the stock's undervaluation, a near 5.8% dividend yield, and its potential as a turnaround play following a pending management restructuring and the spinoff of its healthcare business, Solventum, all point to a promising investment opportunity. Could this be the right time to consider buying 3M stock?
3M's positive news
First, let's recap the recent news, taking the issues in order:
3M CEO Michael Roman will be appointed executive chairman, effective May 1; at the same time, former CEO of L3 Harris Technologies William Brown will replace Roman as CEO.
3M management has reaffirmed its positive financial outlook. It anticipates bringing in $7.6 billion in revenue in the first quarter and has revised its first-quarter earnings per share guidance range from $2 to $2.15 up to a new range of $2.05 to $2.20. This reflects an additional $0.05 per share contribution from the interest on debt raised by Solventum.
Management told investors that the stranded costs (annual costs that will remain with 3M after the Solventum spinoff) would be $150 million to $175 million compared to management's initial estimate of $350 million to $500 million at the time of the spinoff announcement.
Leadership changes at 3M
The change of CEO is unusual and usual at the same time. It's unusual in that Brown is not a 3M veteran (Roman has been at the conglomerate since 1988), and his background at Harris and then L3 Harris is in defense -- an area that 3M has little exposure to.
It's usual in the sense Roman, whose tenure as CEO has coincided with a near 50% drop in the share price, will retain a highly influential presence at 3M as executive chairman of the board of directors. Moreover, 3M has waived the mandatory retirement age at 65 for Roman and Brown, 61. As such, investors hoping that Brown's appointment will result in a dramatic change of strategy are likely to be disappointed.
Outlook change
As noted above, the guidance change isn't down to any operational improvement, so it's not a reason to expect any ongoing improvements. However, there are signs of improvement in some of 3M's key end markets. For example, 3M has exposure to the recovering semiconductor market. At the recent JPMorgan Industrials Conference, Roman spoke about the automotive aftermarket "showing some strengths." That's no surprise, as consumers tend to hold on to their older cars for longer during periods of higher interest rates. In addition, Roman expects markets including "consumer electronics, semi, [and] data centers" will get "better as we go through the year."
This narrative reminds us that, despite the company's ongoing legal issues and its disappointing record of growth and margins over the last decade, there's still a value case for 3M stock.
Stranded costs
Indeed, the value case for the stock is supported by management's restructuring program. CFO Monish Patolawala touched on the program when discussing the improvement in its expectation for stranded costs noted above. He claimed the benefit "was part of the benefit of doing the restructuring program, which was not just to simplify the way we operate, to create an avenue for investments."
This is an essential point because the value case for the stock is based on the idea that management's restructuring program will result in improved margin performance over time. For reference, the plan includes cutting jobs, streamlining corporate costs, cutting management layers, simplifying its supply chain, adjusting its market model around the globe, and cutting less profitable products from its consumer business in particular.
The restructuring will be the key to the company's turnaround hopes, and given that the CEO succession doesn't look likely to lead to an abrupt change of strategy, investors should focus on it as a marker for progress.
3M's dividend
As I've previously noted in other articles, I think it makes sense for 3M to cut its dividend given its pending loss of stable cash flow from Solventum, the ongoing cash calls from legal settlements, and its litigation costs. Indeed, it's notable that Roman prefers to assert that 3M will maintain "an attractive dividend" rather than explicitly confirming that its current payout level will be maintained.
As such, don't be surprised if 3M cuts its dividend, as some Wall Street analysts believe it may well do.
Is 3M stock a buy?
It's hard to predict how the stock will react if 3M cuts its dividend. However, if doing that removes uncertainty from the stock, and if the restructuring program demonstrates real progress in terms of boosting margins, 3M will look attractive.
The key to long-term value creation will be seen in 3M's margin progression, which investors should continue to focus on when considering buying the stock.
Should you invest $1,000 in 3M right now?
Before you buy stock in 3M, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and 3M wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of March 21, 2024
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
3M Raises Guidance and Changes CEO: Is the Stock a Buy? was originally published by The Motley Fool
