3M Settles Lawsuits, Stock Surges: Is Now the Right Time to Buy?
2023.08.29 09:13
- 3M stock recently soared on news that the company recently settled a long-standing settlement
- But, the company’s legal issues remain and could affect its financials going ahead
- Despite all the issues, the company remains in decent shape financially
3M Company (NYSE:), which has been grappling with lawsuits for a considerable period, seems to be inching closer to a resolution.
Around two months ago, the company tentatively settled a water pollution lawsuit by agreeing to pay a $10.3 billion settlement. This week, another significant development emerged in the earplug case.
In the latest update, 3M has agreed to pay $6.01 billion in damages as part of a class-action lawsuit involving hundreds of thousands of US soldiers who allege they suffered hearing loss from using earplugs made by the company.
Initially, investors anticipated compensation to be around $10-15 billion on average. The fact that the agreed amount is considerably lower than expected has been received positively by the market.
This news kickstarted the week with a strong market response. MMM’s stock surged 5% on Monday, reaching $104. A similar leap occurred in June when news broke about a potential $10.3 billion settlement in a water pollution lawsuit.
However, the path forward remains uncertain as 22 US states are seeking to overturn this settlement. Nonetheless, the progress in the lawsuits that have long weighed on 3M’s performance is a positive sign, indicating a potentially brighter future.
Some commentators express a more cautious viewpoint due to the unsettled nature of the water pollution case settlement.
Additionally, while the compensation is expected to be paid over 5 years if an agreement is reached, this could lead to increased debts for the company. Overall, the initial reaction was upbeat, with a significant jump in MMM stock.
The question remains: Will this recent development serve as a catalyst for 3M stock to start an uptrend?
To answer this, let’s delve into the company’s fundamentals using InvestingPro.
3M Company: Fundamental View
Firstly, a look at MMM stock’s fair value on InvestingPro is at $136.5 with medium uncertainty. This suggests an upside potential of 30% from the current price.
Source: InvestingPro
The current share price stands 78% below its peak value over the past year, though it does fare somewhat better compared to its counterparts.
Having maintained a consistent dividend payout over numerous years, the company now boasts a robust dividend yield of 5.8%, outpacing the sector.
Despite registering a positive shareholder return, albeit modest, and a stock beta near 1, it signifies the potential for market-aligned movement during potential upward phases.
Source: InvestingPro
Another notable aspect of 3M’s fundamentals is its consistent profitability over an extended period.
While the company maintains rising figures in terms of gross profit and return on invested capital compared to its industry counterparts, there are some concerning signals arising from the declining trend in operating margin, return on assets, and return on equity.
Source: InvestingPro
Looking at the company’s growth data, it becomes evident that annual revenue growth has contracted by 5.8%.
While the persistent decline in revenue growth over the past year may raise concerns, it’s worth noting that this situation, largely stemming from sectoral challenges, could play a role in bolstering a favorable profit margin as the recovery phase takes hold.
Source: InvestingPro
An additional significant highlight in the second quarter was the resurgence in free cash flow. This development suggests that 3M could potentially present a more robust outlook, particularly in times of crisis, due to the rising free cash flow.
Cash Flow
Source: InvestingPro
Looking at the data, it appears that the debt-to-total capital ratio is increasing and is predicted to continue this trend. This is due to the company’s legal issues, which may result in an increase in debt in the future.
Total Debt
Source: InvestingPro
However, the positive and negative aspects of the company on InvestingPro were summarized as follows:
Positives:
- Dividend increase for 52 years in a row
- Liquid assets above short-term liabilities
- Being one of the important names in the industry sector
Negatives:
- Acceleration of the decline in income growth
- High price-to-book value ratio
- 13 analysts revised their next period earnings expectations downward
The release of 3M’s Q2 financial results on July 25th garnered a positive response, as the data surpassed expectations. Following the announcement of the results, the company’s stock surged by 8%.
Based on the latest figures, the company reported a profit per share of $2.17, surpassing expectations by 23%. The revenue also outperformed predictions, amounting to $8.32 billion, which was 5.6% higher than anticipated.
However, analysts have slightly revised down their earnings per share estimate for the 3rd quarter, now projecting it at $2.37, reflecting a 16% decrease. The company’s estimated revenue for Q3 stands at $8.09 billion.
Source: InvestingPro
Finally, let’s examine the company’s overall health status via InvestingPro.
The latest data shows that the company has a reasonable performance overall. While profitability and net flow are the company’s strongest areas, growth is something that should be closely monitored.
There is a risk of reduced profitability if growth continues to decline in the future.
On the other hand, the fact that the company’s stock has been in a downtrend for a long time has caused the price momentum to remain low.
3M Company: Technical View
Analyzing MMM’s stock from a technical standpoint, it’s apparent that the stock has experienced a decline to $95 over the past few months, following a prolonged downward trend. These levels were last witnessed in 2013.
Following the recovery between 2020 and 2021, the share price encountered a downtrend that initiated around the $200 mark. Despite attempts at recoveries over the past two years, the share price has continued its downward trajectory.
Positive sentiments about 3M’s prospects and recent case developments may boost MMM stock’s recovery in upcoming periods.
Using Fibonacci levels, it is possible to identify important resistance levels for MMM at $113, $125, and $140. Out of these, the resistance at around $125 is the most crucial.
This area is particularly significant in determining the trend of the stock. If MMM’s share price stays below this threshold, there is a possibility that the current downtrend may continue.
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Disclaimer: The author does not own any of these shares. This content, which is prepared for purely educational purposes, cannot be considered as investment advice.
