3M Earnings: Still Not Overly Impressive but Better Than Expected With Signs for Encouragement

After reviewing wide-moat-rated 3M’s MMM latest quarter, we raise our fair value estimate to $131 from $121 previously. After truing up its latest liabilities, we come away more confident in 3M’s liquidity position to fund the dividend. Results were also better than we expected. However, we point out that 3M’s potential legal outcomes remain widely uncertain, and we’re closely examining the effects of PFAS, both on the environment and on people. Of course, ear plug litigation related to Combat Arms remains another critical area of concern.

We encourage investors to adopt a wait and see mode in this stock as it remains in the “too hard” bucket for now. We think the current debate on the stock revolves around whether these collective liabilities possess existential risk, and we’re sitting on the sidelines until we review additional evidence. Known unknowns include 3M’s cleanup responsibilities and what conditions PFAS may cause in humans, if any. However, for now, we’ve reassessed and believe 3M has enough liquidity to fund its dividend, subject to any pro rata adjustments following the healthcare spinoff sometime during the end of this year or beginning of next year. We forecast net debt/adjusted EBITDA of 1.5 turns for full-year 2023, suggesting 3M’s balance sheet still has a good amount of room to take on more leverage. Based on our estimates, it could take on about $7 billion more in debt right now and remain in line with U.S. multi-industry peers on a net leverage basis.

During the quarter, adjusted net revenue declined to $7.99 billion from $8.34 billion previously, though the decline in organic sales was a negative 2.5%. Similarly, adjusted operating margin declined 220 basis points to 19.3% from 21.5%, previously. That said, we were expecting a bit worse on the top line and far worse on an operating margin basis. Consequently, we did raise our adjusted EPS expectations to $8.60, once again at the bottom end of the guidance range.