3M Quietly Outperforming Ahead Of A Short-Cycle Turn

I thought 3M (MMM) had some relative appeal back in January, before COVID-19 became a global pandemic, and the shares have outperformed their peer group by about 14% in that short window since. I think there are several parts to this. 3M’s leverage to N95 respirators certainly counts for some of it, but I also think 3M has outperformed on the perception that its businesses will be more likely to see an earlier recovery and that it was already underway with some restructuring activities before the downturn.

With that relative outperformance, I don’t see as much upside at this point. I don’t think COVID-19 will have a substantial long-term impact on the business, and I still expect 3M to deliver low-single-digit revenue growth, mid-single-digit FCF growth, and healthy capital returns over time. But given the relative value opportunities with names like Eaton (ETN), Emerson (EMR), Honeywell (HON), ITT (ITT), and Parker-Hannifin (PH), I can’t say that 3M is far and away the top call now, though 3M does have the advantage of relatively less exposure to problematic markets like non-residential construction, aerospace, and oil/gas.

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3M Quietly Outperforming Ahead Of A Short-Cycle Turn