3M Leveraging The Early Recovery, With Further Room For Self-Improvement

Despite its reputation as an early cyclical mover, 3M (MMM) hasn’t gotten a lot of love lately in a market that couldn’t seem to get enough of cyclical stories, as industrials continued to perform well through the end of 2020 and into 2021. While 3M has definitely perked up since its fourth quarter earnings report, it had spent most of the last three months lagging the broader industrial space, including good recovery names like Eaton (ETN), Emerson (EMR), ITT (ITT), and Parker-Hannifin (PH).

While some of the underperformance may be due to perception around 3M’s risk to PFAS legislation and litigation, I believe it’s also due at least in part to the choppy recovery we’ve seen so far across industrial and healthcare markets. Some end-markets, like autos, have definitely started to improve, but many othes have shown decidedly mixed performance.

I believe 3M will enjoy a couple years of above-trend growth as the global economy recovers, and I believe the latest restructuring effort will provide another boost to margins. I’d still like to see a more dramatic restructuring (exiting some less promising and lower return businesses and moving into more attractive markets), but if 3M can hit my long-term of just modestly above-GDP revenue growth and two or three points of FCF margin leverage, the shares look like a comparatively rare bargain in the industrial space.

 

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3M Leveraging The Early Recovery, With Further Room For Self-Improvement