Investors should focus on the positives of the third quarter

The 3M company (NYSE: MMM), being a manufacturing company, had a difficult year-end due to supply chain constraints and high consumer prices. The company performed surprisingly well in its most recent quarter, so I’m bullish on 3M stock despite the market’s lackluster response.

Based in freezing Minnesota, 3M is a formidable manufacturing giant. The company’s technology products run the gamut from electrical, ceramic, packaging and health/protection equipment to stationery products and air quality solutions. Indeed, chances are that if you’re somewhere in the United States right now, you’re using a product that 3M helped create.

However, sometimes financial traders do not respect 3M. Short-term thinking can cloud people’s judgment and cause them to focus too much on negative outcomes, which could actually be positive given the difficult circumstances in 2022. Over time, however, investors should come to appreciate 3M’s resilience despite the hurdles – and if/when they do, MMM shares could catch a large, late bid.

3M made a smart move by reducing its operations

Sometimes in the business world, bigger isn’t always better. There are occasions when it makes sense to divest or split up operating units when they are not necessarily part of a company’s core business. Clearly, 3M executives understand this principle because they applied it strategically during the third quarter of 2022.

Commenting on 3M’s performance in the third quarter, Chairman and CEO Mike Roman pointed out that his company divested its food safety business during the quarter. Additionally, 3M “began executing the workflows” to create its healthcare unit, “resulting in two world-class public companies.”

It may be too early to tell whether these moves to cut 3M will improve the company’s shareholder value. At the very least, however, we can cite a few data points that suggest 3M is heading in the right direction.

The company’s adjusted earnings per share (EPS), excluding the impact of special items, was $2.69 in the third quarter of 2022. This result exceeded the $2.58 posted in the previous quarter as well as the 2, 60 dollars that Wall Street analysts had anticipated.

Keep in mind that 3M made this profit despite what Roman correctly called a “very uncertain” macroeconomic environment. It’s commendable, really, that a manufacturing company can manage to turn a profit that beats expectations “in the midst of macroeconomic challenges and the strengthening US dollar,” as the CEO put it.

So, maybe now is the time for 3M to become a leaner company and continue down the path of bottom line growth. Yet, as we’ll find out in a moment, not everyone is bullish on MMM stocks despite the company’s strong earnings.

Slight revenue loss caused traders to miss the big picture

Sensible investors can’t afford to wear rose-colored glasses in the 2020s. If a company like 3M is posting mixed results, we have to recognize the good, the bad, and even the bad data points. In this case, the bad points are for 3M’s third-quarter revenue — which, in reality, wasn’t that bad.

Here is the recap. Analysts had modeled $8.71 billion in revenue for 3M in the third quarter of 2022, but the company generated $8.62 billion. Additionally, the result indicates a decline in 3M’s revenue of $8.94 billion from the prior year quarter.

Again, we need to put this into perspective and never lose sight of the bigger picture. Roman was right to cite the strength of the US dollar, which has made it more expensive to pay interest on loans this year. Also, let’s not ignore the “macroeconomic challenges” Roman refers to, which would likely include trade tensions with China, conflicts with Russia, and a persistently high US consumer price index.

Despite these extenuating circumstances, financial traders nonetheless opted to push MMM’s stock price into the red after 3M released its third quarter report. It just goes to show that sometimes traders can behave like spoiled brats – but that only provides an opportunity for mature, forward-thinking investors.

After all, look at the good price you would get if you took a position in 3M now. The company’s 12-month P/E ratio is quite reasonable at 16.5x. Plus, as a bonus, 3M pays out a generous forward annual dividend yield of 5.1%.

Is MMM Stock A Buy, According To Analysts?

As far as Wall Street is concerned, MMM stock is a moderate sell based on eight hold and five sell ratings. The 3-month average price target is $126.77, implying an upside potential of 7.56%.

Conclusion: Should You Consider 3M Stocks?

Apparently some short-term traders can’t see past the difficult circumstances 3M overcame to achieve its impressive third-quarter earnings growth. They might not appreciate 3M’s smart strategy to downsize and, in doing so, overcome multiple challenges beyond 3M’s control.

On top of all that, skeptics and sellers are missing out on a great deal and dividend reinvestment opportunity with MMM stocks. Overall, 3M has performed very well and investors should seriously consider starting a long-term position before the market picks up.


Robert D. Coleman