3M: A $10 Billion-Plus PFAS Settlement May Not Change Value, but Would Provide Certainty

On June 2, media publications reported 3M MMM struck a tentative per- and poly-fluoroalkyl substances, or PFAS, chemicals settlement with municipal providers of consumer drinking water. The settlement, reported to be over $10 billion, however, would purportedly exclude state, federal, and foreign environmental suits, as well as personal injury claims, among others. Assuming a potential settlement is closer to $10 billion, this would lower our fair value estimate by about a mid-single-digit percentage. Despite the large, purported settlement, we consider this a positive news item for the stock. It provides some certainty for the market in a slightly undervalued name, but with both real and headline risk.

We would also likely retain our High Morningstar Uncertainty Rating, with a nearly $20 billion liability for PFAS in our base case, over $30 billion in our bear case, and $10 billion in our bull case. In total with Combat Arms (earplugs made for the U.S. military) liabilities, our total litigation-related call on 3M’s enterprise value would total well over $20 billion in our base-case scenario. That figure excludes recurring legal fees between $200 million and $300 million annually, which we were previously baking in.

For now, we retain our $127 fair value estimate, but even with a potential cut, we think the stock remains somewhat discounted. However, we don’t think the discount affords investors a large enough margin of safety in the name, particularly given the litany of operational challenges the company faces for an extended time. While we’re less bearish than the market on 3M’s legal liabilities, we’re less bullish on 3M’s long-term fundamentals.