The industrial giant’s prospects are improving, but questions around its dividend and strategic direction remain.
Shares in 3M (MMM -1.25%) rose by a market-busting 15.1% in March, according to data provided by S&P Global Market Intelligence. The move came in a period of relatively positive news flow for the company.
3M’s good news month
3M investors have grown accustomed to receiving disappointing news from the company, whether it’s ongoing legal issues, disappointing sales growth, or declining margin performance. However, signs of improvement emerged in March.
Management’s presentation at the J.P. Morgan Industrials Conference was a great example. First, CEO Michael Roman increased the company’s first-quarter earnings-per-share guidance to between $2.05 and $2.20 from a previous estimate of $2 to $2.15. While the news was not particularly exciting, it indicates that the overall conditions are not deteriorating.
The upgrade resulted from a $0.05 increase in interest on the Solventum debt raise (3M’s healthcare business, now spun off), not from operational improvement.
That said, there are signs that some of 3M’s key end markets are bottoming, with Roman expecting consumer electronics, semiconductors, and data centers to strengthen through the year. Meanwhile, the automotive aftermarket remains strong, and 3M has a growth opportunity through the increasing electrification of vehicles coming from electric vehicle (EV) sales growth.
A new CEO
Roman’s tenure as CEO has not been covered in glory, and the news that former L3Harris Technologies CEO William Brown will replace him in early May will be welcomed in some quarters. Still, Roman is moving to the role of executive chairman of the board of directors, and 3M waived the mandatory retirement age for both Roman and Brown.
Image source: Getty Images.
3M’s restructuring program
The company is criticized for declining margin performance, but management believes it’s turning that around with its substantive restructuring actions. Management expects margin expansion this year due to the restructuring. CFO Monish Patolawala stated that the stranded costs (annual costs remaining with a company after a spinoff takes place) would be in the range of $150 million to $175 million rather than the $350 million to $500 million range that management had initially expected at the time of the spinoff announcement.
Patolawala put that improvement down to the restructuring actions taken, not least to streamline the corporate center.
A stock to buy?
The stock remains a good value, and 3M is making progress, albeit slowly. Its end markets also look likely to improve in 2024, particularly if interest rates are cut. Still, there are a lot of questions about the sustainability of its current dividend, and until that’s clarified, I think the stock is worth avoiding.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
