Why the Turnaround Thesis on 3M Stock Is Gaining Credibility

It’s been a rough run for 3M (NYSE:) stock over the past two years. During that stretch, slowing global growth trends have coupled with rising geopolitical and trade tensions to create significant revenue and margin headwinds for the global industrial giant.

3M Stock Is More Than Just a Dividend Darling

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As a result, its revenue growth is flat, its margins have retreated, and its profits, as well as 3M stock price, have dropped.

Back in 2018, MMM was a $250 stock. Today, MMM stock trades hands around $160. That is a 35% shellacking over the past 18 months. MMM hasn’t dropped that much since the 2008 financial crisis.

In other words, 3M stock is acting like the global economy is sprinting straight into a recession.

It’s not. Instead, multiple data points suggest that the global economy is actually starting to stabilize and even improve after it suffered a setback in early 2019. One of those data points is 3M’s second-quarter results.

In Q2,  the company’s  revenue growth and margins rose versus Q1, Moreover, its top line and margins look poised to continue to rise for the rest of the year.

As a result, the present selloff of MMM stock seems overdone. Over the next several quarters, the global economy will pick up steam. As it does so, 3M’s revenue and margin trends will continue to improve, causing  MMM stock to bounce back.

3M’s Numbers Will Continue to Improve

The first part of the bull thesis on 3M stock is that this company’s underlying trends and fundamentals will improve meaningfully over the next few quarters.

There’s a big debate right now as to whether the 2019 economic slowdown is just another bump in the road or the final straw that will break the camel’s back. I think it’s the former.

For starters, the Fed and Trump are trying to boost the economy and the stock market. For better or for worse, U.S. President Donald Trump has tied his success to the success of the stock market. Because of that, he doesn’t want to enter the 2020 election cycle with stocks in a tailspin or the U.S. economy in trouble. Thus, all his trade-war talk is just chest-puffing; Trump won’t do anything that will meaningfully harm the U.S. economy before the 2020 election.

At the same time, the Fed has also somewhat married itself to the idea that its job is to prolong the current economic expansion. Thus, the central bank has shown  a willingness to inject stimulus into the economy.

This combination of proactive stimulus and a president who is inclined to put the trade war on hold for the foreseeable future indicates  that global economic activity should re-accelerate over the next few quarters.

As it does, 3M’s growth trajectory – which mirrors global economic growth – should re-accelerate, too. That’s already happening.

In Q2, its organic revenues dropped just 0.9% year-over-year, better than Q1’s 1.1% drop. Further, its underlying core margins improved from Q1 to Q2. For Q3, its organic revenues are expected to be flat to up, while its margins are expected to continue to improve.

3M Stock Will Bounce Back

Assuming that 3M’s growth trajectory does meaningfully improve in the back half of 2019, then 3M stock is attractively positioned for a gigantic rally heading into the end of the year.

Here are the numbers. MMM’s organic revenue growth was negative in Q1 and Q2. Management thinks it will be flat to up in Q3, and the full-year guidance implies that the company expects its organic revenue growth to  be solidly positive by Q4.

Meanwhile, MMM said on its conference call that its underlying margin trends are improving, and that the rebound will persist into the back half of 2019, implying that its Q4 margins could rise  YoY.

So 3M could go from negative revenue growth and margin compression today to positive revenue growth and margin expansion by Q4. That is the sort of turnaround that will force the analysts to raise their estimates.

At the same time, such a turnaround would get investors to once again believe in the long-term growth outlook of 3M. As investor sentiment improves, the valuation of MMM stock will normalize, from today’s forward price-earnings multiple of 17.5 back to the five-year-average forward P/E multiple of nearly 20.

All in all, then, MMM stock has the potential to benefit from both rising estimates and multiple expansion in the back half of 2019. If all that materializes as expected, then MMM stock could have a huge second-half rally.

The Bottom Line on MMM Stock

The last 20 months have been ugly for MMM stock. But there’s reason to believe that the worst is now in the rear-view mirror for 3M, and that, going forward, its fundamental growth trends will meaningfully improve. If they do, then 3M stock is poised for a huge rally over the next few quarters.

As of this writing, Luke Lango was long MMM. 

The post appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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