*** ONE-TIME USE *** 3M Co. Scotch brand shipping tape arranged in Seattle, Washington, U.S., on Saturday, Jan. 23, 2021.
Chona Kasinger/Bloomberg
Consumer/industrial conglomerate 3M caught a downgrade Tuesday. It might feel like an odd time to downgrade 3M shares. The economy is improving, which is usually great news for industrial stocks. What’s more, 3M earnings are poised to go higher in years to come. But there are a couple of headwinds faced by the company that could keep a lid on shares.
Credit Suisse ‘s John Walsh is the analyst downgrading 3M (ticker: MMM) stock. His rating goes to the equivalent of Hold from Buy. His price target edged up, however, to $212 from $210. But with shares at about $196.50, there isn’t enough upside to keep his Buy rating.
Walsh’s downgrade is weighing on shares in late trading Tuesday. 3M stock is off about 1.6%. The S&P 500 and Dow Jones Industrial Average, for comparison, are off about 0.5% and 0.8%, respectively.
Walsh bumped his price target up because he increased his earnings estimates for 2022, to $10.60 a share from $10.50. Earnings are expected to be about $9.84 a share in 2021, up from $8.74 earned in 2020. Walsh even sees $11-plus in per share earnings potential down the road, but he doesn’t think shares will keep rising. Instead, he worries the valuation multiple could shrink while earnings inflate–the result, in that scenario, would be a stagnant stock.
The first problem Walsh sees for 3M shares is cyclical. “We do not expect to see significant multiple expansion given….where we are in the cycle.” Industrial stocks typically do well when the economy is transitioning from recession back to growth. Later on, when growth levels out, there is less opportunity for earnings improvement at firms such as 3M. At that point, some investors forget about industrial stocks and look for other ideas.
The second problem is uncertainty arising from legal liability. 3M still faces liability and costs related to PFAS clean up. PFAS is a chemical that was manufactured by a few companies, including 3M, a long time ago. The chemical has made it into ground water where it was manufactured, and the EPA wants old sites cleaned up. Just how much money it will take and whether families will win compensation for local pollution impacts isn’t fully known.
The second legal problem is related to ear plugs sold to the military manufactured by 3M. A few settlements related to military veterans’ hearing loss have been reached, but hundreds of thousands of claims remain.
The size of the ear plug liability, like the PFAS problem, isn’t known yet. The company wasn’t immediately available for comment about either issue Tuesday.
With the downgrade, only 15% of analysts covering the stock rate shares Buy. The average Buy-rating ratio for stocks in the S&P is roughly 55% The average analyst target price is about $200, a little lower than Walsh’s $212 target price.
Write to [email protected]
