3M Stock Drops After Strong Q3 Earnings: Time To Buy?

Key Points

• 3M beat earnings and revenue estimates in the third quarter.
• 3M stock was the top performer on the Dow in Q3.
• The stock was trending lower on Tuesday. Is it time to buy?

Dividend King 3M has had a difficult past couple of years but are things starting to turn around?

The 3M Company (NYSE:MMM) has been one of the worst large-cap stocks on the market over the past five years, but things appear to be looking up for the industrial staple.

The company reported third quarter earnings on Tuesday that showed huge gains and an improving outlook.

The maker of some 60,000 household products, like Scotch Tape, generated $6.3 billion in net sales in the third quarter, up around 0.4% year-over-year. On an adjusted basis, sales were up 1% to $6.1 billion, topping analysts’ estimates.

Net income came in at $1.37 billion, up from a $2.1 billion net loss in the same quarter a year ago. Earnings per share were $2.49 per share, up from a net loss of $3.74 a year ago. On an adjusted basis, 3M had earnings of $1.98 per share, up 18% year over year and ahead of estimates of $1.90 per share.

It was the second straight quarter of earnings gains, however, investors were skeptical, as the stock fell 2.5% in morning trading to roughly $131 per share. Is the selloff warranted?

Best performing stock on the Dow

3M has had a tremendous year, bouncing back from a dreadful past five years, that were mired in lawsuits and multi-billion settlements over faulty products and PFAS contamination issues. 3M is paying $6 billion for the faulty combat earplugs lawsuit through 2029 and $10.3 billion over 13 years for the PFAS chemical contamination lawsuits.

Over the past five years, 3M stock has had an average annual return of -1% and over the past 10 years it has returned just 1% annually.

But this year, 3M has been good to investors, as the stock price is up 44% year-to-date and it gained most of that in the third quarter when it rose 34% to finish Q3 as the top performer on the Dow Jones Industrial Average.

A lot of it has to do with settling its lawsuits. While the penalties are steep, they are at least a known quantity now, removing some of the uncertainty. 3M also hired a new CEO back in May, William Brown.

One of the initiatives Brown has been driving, which started with the previous CEO Mike Roman, is to cut expenses, drive efficiencies, and sell off assets, like its healthcare business Solventum (NYSE:SOLV), which is now a public company. That has resulted in a massive reduction in expenses, from $9.3 billion in Q3 2023 to around $5 billion in Q3 2024. That streamlining improved 3M’s adjusted operating margin to 23%, from 21.6%, and accounted for the majority of 3M’s earnings spike.

“The 3M team delivered another quarter of strong operational execution, resulting in a double-digit increase in adjusted earnings along with solid adjusted free cash flow generation,” said Brown. “Our ongoing execution positions us well to deliver a strong finish to the year. I am confident that our work on advancing our three priorities – organic growth, operational excellence, and capital deployment – will deliver long-term value creation for our shareholders.”

3M raises its guidance for fiscal 2024

In addition to strong earnings, 3M also raised its earnings guidance for fiscal 2024, calling for adjusted EPS of $7.20 to $7.30, which is up on the low end from the prior guidance of $7.00 to $7.30.

It also narrowed its adjusted sales growth increase to 1%, from the previous guidance of -0.25% to 1.75% growth.

However, while somewhat positive, the full-year projections imply that earnings will be below analysts’ projections for Q4, thus the selloff.

Investors may also be wary that the sharp rise in the stock price this year may be making 3M stock a bit too hot. It currently has a trailing P/E of 52 and a forward P/E of 17 – with the latter up from about 9 a year ago.

Is 3M stock a buy?

I wouldn’t expect to see the type of growth 3M has had this year in the near-term, as a lot of it was just from investors buying cheap for the dividend, hoping to get some capital appreciation as well. They got both from this Dividend King, which has had 65 years in a row of dividend increases.

However, with the steep settlement payments due for the next several years, you wonder if 3M will be able to have the excess cash to continue that dividend streak.

Investors who got in last spring have had a nice ride, but it’s a bit too pricey, and too early in the turnaround, to expect more of the same. I’d probably hold off on this stock right now and see what next quarter brings.

This post originally appeared at ValueWalk.com.

Category: Dividend Stocks To Buy?