Attractive Yield Adds to 3M Stock's Appeal Today
Litigation fears are overblown for this dividend-paying conglomerate, says Morningstar's analyst.
Litigation fears are an overhang on 3M’s (MMM) stock and are responsible for the persistent price/value gap, in our view. We think these fears are overblown. We also think the market fails to appreciate 3M’s short-cycle nature, which benefits during the early stage of a recovery.
In our view, 3M is a GDP-plus business. We attribute 3M’s ability to remain ahead of GDP to its suite of innovative products, which are a byproduct of its research and development efforts. At its core, 3M is a materials science company. Its legion of engineers improves everyday products down to their basic chemistry. For instance, 3M’s microreplication technology, which has been around since the 1960s, was originally used in overhead projectors. That technology has now been adapted for multiple uses, including making signs brighter and reducing friction in aerospace applications. More recently, it is being developed for vaccine delivery as an alternative to hypodermic needles.
The company’s proprietary secrets are closely held; 3M rarely grants licenses, yet its technology is difficult to imitate. As a result, 3M typically charges a 10%-30% price premium relative to the market. Its ability to adapt its technology for multiple uses also gives it economies of scope, which helps reduce overall unit costs, evident in superior gross margins.
We believe the company can increase its top line over 4% over the medium term thanks to broad-based strength, even as respirator sales become a near-term headwind. With the recent acquisitions of workflow solutions provider M*Modal and negative woundcare solutions provider Acelity, we believe 3M can capitalize on the stable and ever-growing healthcare market. Healthcare benefits from multiple positive secular trends, including an aging population, greater access to care, and a rising incidence of chronic disease and surgical procedures.
3M hasn’t increased intrinsic value over the past four years, by our measure; we attribute this to a combination of self-inflicted wounds and pandemic-related headwinds. Even so, we think the company is well positioned in some higher-growth markets.
Joshua Aguilar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.