3M’s 29.1% return over the past six months has outpaced the S&P 500 by 18.6%, and its stock price has climbed to $129.75 per share. This run-up might have investors contemplating their next move.
Is there a buying opportunity in 3M, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.We’re happy investors have made money, but we're swiping left on 3M for now. Here are three reasons why there are better opportunities than MMM and a stock we'd rather own.
Why Do We Think 3M Will Underperform?
Producers of the first asthma inhaler, 3M Company (NYSE:MMM) is a global conglomerate known for products in industries like healthcare, safety, electronics, and consumer goods.
1. Core Business Falling Behind as Demand Declines
Investors interested in General Industrial Machinery companies should track organic revenue in addition to reported revenue. This metric gives visibility into 3M’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, 3M’s organic revenue averaged 1.2% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests 3M might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for 3M, its EPS and revenue declined by 4.6% and 5.8% annually over the last five years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, 3M’s low margin of safety could leave its stock price susceptible to large downswings.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. 3M’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
3M falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 16.9× forward price-to-earnings (or $129.75 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at TransDigm, a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Like More Than 3M
The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market to cap off the year - and we’re zeroing in on the stocks that could benefit immensely.
Take advantage of the rebound by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,691% between September 2019 and September 2024) as well as under-the-radar businesses like Comfort Systems (+783% five-year return). Find your next big winner with StockStory today for free.
