3M (NYSE: MMM)
released its fourth-quarter numbers yesterday, and beat on the top and bottom lines. Shares gained more than 3% on high volume, and neared the $180 level, where 3M has faced resistance since last summer.
So, does 3M have what it takes to break through? Or are shares going to head back down to around $160?
Let’s start by digging into the Q4 numbers:
3M reported revenue of $8.6 billion in Q4, up 5.8% yoy and above analyst estimates of $8.4 billion. EPS came in at $2.38, up 43% yoy and above Wall Street estimates of $2.15.
The company’s safety and industrial business saw organic growth of 11.4% yoy in Q4. According to management, pandemic-related respirator mask demand provided a 10-percentage point benefit to the growth rate.
Insufficient mask production was one of the biggest issues in the early stages of the pandemic. But 3M has done an incredible job of increasing capacity. On the Q4 earnings call, CEO Mike Roman talked on that: “In total, last year (2020), we produced and delivered 2 billion respirators globally, with approximately half in the United States. Today, we are at an annual run rate of 2.5 billion respirators, a fourfold increase versus 2019.”
Roman also pointed out “sequential improvement” in the automotive OEM segment. This segment was a weak spot in Q2, so it’s encouraging to see sales trending in the right direction.
Another weak spot in Q2 was health care; 3M’s oral care business was down 60% yoy in Q2 due to delays in elective procedures. But the oral care business has bounced back over the last two quarters. In Q3, it was up low-single digits “driven by the reopening of dental offices globally and the rebuild of channel inventories.” In Q4, the oral care business’s organic sales were flat yoy. 3M said that rising COVID cases prevented the business from growing, but still, flat is a heck of a lot better than down 60%.
Guidance Wasn’t Great, But It’s Better Than Nothing
3M is forecasting 2021 EPS of between $9.20 and $9.70 per share. The $9.45 midpoint was 7 cents per share shy of the average analyst estimate of $9.52 per share. It is, however, higher than the $8.74 in EPS for full-year 2020.
Ideally, 3M’s forecast would have come in above what Wall Street was expecting, but simply offering guidance is more than a lot of industrial companies are willing to do in the current environment. Moreover, 3M is probably erring on the side of caution with its estimates, and earnings could quite possibly come in at the higher end of the range. Or more.
What About Polyfluoroalkyl Substances?
Ah, polyfluoroalkyl substances (PFAS). For those who have never heard of PFAS, it’s a chemical that has caused water contamination. How does this relate to 3M?
The company used the chemical until the early 2000s, and it still facing litigation today. 3M recorded a $752 million liability charge against earnings in 2019 to account for it, but that may not be the final amount. With Democrats now controlling the presidency and both houses of Congress, some investors are spooked.
3M addressed the liability on its Q4 call, saying that its “corporate and unallocated expense was up approximately $100 million yoy.” But that expense accounts for not just the PFAS liability but also the company’s “respirator mask reserve.”
Here’s the deal:
Even if the final amount is higher than $752 million, it probably won’t be much higher. 3M has a market cap of around $100 billion. That $752 million is less than 1% of the company’s market cap. So, the settlement is unlikely to impact the viability of a 3M investment.
3M Shares Could Be Headed Higher
3M has successfully navigated the pandemic, increasing mask production and turning around struggling segments. Furthermore, the company looks set for modest growth over the next two years.
At 18.5x forward earnings, you can get that growth at a reasonable price. Another thing you can get is an outstanding dividend. 3M’s dividend is 3.34% and has been increased every year for more than 60 years. The company’s 68% payout ratio is a bit high, but future earnings should be able to easily support further increases.
Bottom line: there’s a good chance that 3M breaks through the $180 level in the near future.
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