The Sell-Side Hates 3M. We Don't.

After reviewing the impact to 3M’s MMM segments during the Great Recession, we reduce our fair value estimate to $170 per share from $186 per share previously (about an 8.5% reduction). The reduction in fair value is materially less than what we saw during the financial crisis given the surge in demand from 3M’s N95 respirators, which add about $7 per share to our valuation (otherwise the reduction would have been similar to the approximately 12.5% cut we implemented at the end of 2008).

We think the production of 3M’s respirators are a decent catalyst in the stock that the market fails to appreciate. While we confess our visibility is low, we assume 3M sells each respirator on average at a price of about 70 cents (with no additional price inuring from COVID-19 related sales), and further assume a gradual ramp to a production rate of 2 billion units from 1.1 billion previously (which is an annual figure, which we then divide by 12 to get the monthly figure). We then deduct the sales benefit from 3M’s prior production rate (about half of the current 1.1 billion), and we estimate 3M will see an additional sales windfall of about $700 million in 2020.

We’d also expect to see some modest benefit to cleaning solutions, including scrubbers and wipes frequently used on kitchen and bathroom surfaces (mostly sold through 3M’s Scotch-Brite brand). While we expect 3M will no longer “return to growth” as was its intent at the beginning of year when it issued guidance, we’re only modeling a 0.3% decline to its top line. In other words, the benefit from recent acquisitions in M*Modal and Acelity, as well as these newer tailwinds won’t be enough to offset the weak macro environment and 3M’s China exposure (APAC is about 31% of sales; China about 10% of total sales).

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