Wall Street is warming to the industrial giant’s investment proposition as a new CEO seeks to improve the company’s growth rate.
Bank of America Securities recently upgraded 3M (MMM -0.05%), with analyst Andrew Obin changing the stock to a buy rating from neutral and hiking his share price target to $120 from $105. This represents a more than 19% premium over the next 12 months to the current stock price.
3M initiated some derisking actions
The key to the investment case for the stock involves recognizing that 3M reduced some uncertainty around several key issues overhanging it in recent years. For instance, 3M entered into a $10.3 billion settlement agreement with public water suppliers over its production of PFAS chemicals. It also entered into a $6 billion settlement with combat arms earplugs claimants. As such, investors have a clearer picture of the multiyear and multibillion payments 3M will need to make over the next decade.
In addition, 3M spun off its healthcare business, Solventum — a move that will result in about $7.7 billion in cash payments to 3M. The company also retains a 19.9% stake in Solventum (currently worth $1.94 billion), which it can sell to raise additional cash. Furthermore, 3M cut its dividend, freeing up future cash resources to help grow the business.
3M is taking a new approach
Increasing its growth rate is a crucial consideration, and 3M’s new CEO William Brown has an opportunity to take a fresh look at 3M and restructure the company for a return to growth.
Brown’s tenure starts on a relatively positive note, as some of 3M’s key end markets, such as semiconductors and electronics, are in recovery mode in 2024. In addition, the cost-cutting program launched last year appears to be improving margins.
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An attractive valuation
While there’s no guarantee that 3M will turn around years of operational underperformance, and Brown hasn’t laid out his strategic vision yet, the potential is there. It also helps that 3M trades on an attractive valuation. It all adds up to make BofA’s new price target a reasonable one for investors to aim for, and the stock is worth buying for value investors.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends 3M and Solventum. The Motley Fool has a disclosure policy.
