3M Company’s MMM investors have been witnessing some short-term gains from the stock of late. The conglomerate giant’s shares have gained 29.8% in the past six months, outpacing the S&P 500 composite’s growth of 13.1% and the sub-industry’s decline of 10.3%. The company has also outperformed other industry players like Honeywell International Inc. HON and Griffon Corporation GFF, which have returned 7.5% and 23.4%, respectively, over the said time frame.

MMM Stock’s Six-Month Price Performance

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Closing at $131.49 in the last trading session, the stock is trading below its 52-week high of $141.34 but significantly higher than its 52-week low of $75.65. 3M crossed its 50-day simple moving average (SMA) on Dec. 5, reaching a key support level from a technical perspective. The stock is also trading above its 200-day SMA at the current level, indicating robust upward momentum and price stability. This technical strength reflects positive market perception and confidence in MMM’s financial health and prospects.

MMM Stock Trading Above 50-Day & 200-Day Moving Averages

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What’s Behind 3M Stock’s Momentum?

3M is benefiting from persistent strength in the Safety and Industrial segment. Solid momentum in the industrial adhesives and tape end markets, driven by an increase in the sales of bonding solutions for electronic devices, has been driving the segment’s performance. The segment’s organic sales improved 1% year over year in the third quarter of 2024.

Strength in the commercial branding and transportation end markets has also been driving the company’s Transportation and Electronics segment. Solid electronics demand, backed by an increase in production volume, by electronics original equipment manufacturer (OEM) customers bodes well for the segment. However, weakness in the automotive electrification market due to a decline in automotive OEM build rates remains a concern. The segment’s adjusted organic revenues grew 2% in the third quarter. 

Backed by strength across its businesses, the company’s total adjusted revenues increased 1.5% to $6.1 billion in the third quarter. For 2024, it expects total adjusted organic sales to grow approximately 1% on a year-over-year basis.

3M has been undertaking several restructuring actions that include streamlining the geographic footprint, simplifying the supply chain and optimizing manufacturing roles to align with production volumes. In the third quarter, these actions, together with strong organic volume and productivity, boosted 3M’s adjusted operating margin by 140 basis points year over year to 23%.

The company also remains focused on increasing shareholders’ wealth through dividend payments and share buybacks. In the first nine months of 2024, it paid dividends worth $1.6 billion and repurchased shares for $1.1 billion. Exiting the third quarter, it had $3.1 billion remaining under the share repurchase program. Also, in February 2024, its quarterly dividend was hiked by 1%.

Better-Than-Industry Returns of MMM

MMM’s trailing 12-month return on equity (ROE) is indicative of its growth potential. ROE for the trailing 12 months is 104.7%, much higher than the industry’s 31.2%. This reflects the company’s efficient usage of shareholder funds.

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Estimate Revision Trend

The company’s earnings estimates for 2024 have increased 0.4% to $7.27 per share over the past 60 days. Earnings estimates for 2025 have inched up 0.1% to $7.87 per share.

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A Few Near-Term Concerns Prevail

While MMM is experiencing positive trends in most markets, it has been grappling with persistent weakness in the Consumer segment. The segment’s revenues declined 1.2% in the third quarter, following a 2.4% decrease in the previous quarter. There was particular weakness in the packaging & expression, home & auto care and consumer safety and well-being businesses. It expects consumer retail discretionary spending on hardline goods to remain muted in the near term, which is likely to affect its performance.

MMM’s high debt level remains a concern for its profitability. Exiting the third quarter, the company’s long-term debt was $11.3 billion. Its short-term borrowings and current portion of long-term debt totaled $1.9 billion. Also, interest expenses in the first nine months of 2024 remained high at $939 million, increasing 64.5% on a year-over-year basis. It’s worth noting that 3M’s long-term debt-to-capital ratio is 70.7%, much higher than the industry’s 25.9%.

The company has also been subject to several litigations, including earplug lawsuits. It has committed substantial funds to resolve these disputes as ongoing litigation might lead to additional expenses.

Valuation Remains an Overhang for 3M

MMM is trading at a significant premium to industry peers with a forward 12-month price-to-earnings (P/E) multiple of 16.78X. The current valuation is above its five-year median of 15.05X and has surpassed the broader industry’s multiple of 15.43X. However, the stock is undervalued compared with its peer, Carlisle Companies Incorporated CSL, which is trading at 19.14X.

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Conclusion

Given the strength across its businesses, solid earnings estimates and robust share price returns, maintaining a position in 3M appears to be the right choice. Near-term challenges, such as weakness in the retail market, high debt level and premium valuation, are limiting this Zacks Rank #3 (Hold) company’s near-term prospects.

While current shareholders should hold their positions, new investors should wait for the stock to retract some of its recent gains and provide a better entry point.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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