With its inclusion in the Dow Jones Industrial Average and its extensive history raising its dividend, 3M (MMM 0.75%) is a stock that a variety of investors follow closely. As popular as it might be, though, there's hardly a consensus about what lies ahead.
While some are optimistic, others have taken a more cautious approach. To provide greater insight into its prospects and the potential pitfalls, two fool.com contributors examine the bear and bull arguments for 3M stock.
The bear case for 3M
Lee Samaha: Even setting aside its ongoing exposure to potential legal liabilities, 3M has struggled operationally in recent years. Its profit margins have declined, and its management has developed a habit of missing guidance, particularly on sales.
Key Data Points
The latter is not a minor issue. Presumably, management structures its operations and the cost base around the sales volumes it believes it will hit. Unfortunately, if a company keeps missing sales guidance, it will likely suffer margin erosion and the need to restructure. Both things have happened to 3M in recent years, and the company is again undertaking a significant restructuring.
While that will help, and 3M did raise its full-year margin guidance on its recent earnings call, its management once again prepared investors to expect full-year organic revenue growth "at the lower end of our guide that we had given, which was flat to minus 3% coming into the year," according to chief financial officer Monish Patolawala on the earnings call.
As such, 3M's sales guidance is under pressure again, and it wouldn't be a surprise to see it fail to hit its initial full-year guidance again. All told, the recent results were a step in the right direction, but it was a small step, and there are still a lot of questions about the company's ability to deliver for shareholders.
The bull case for 3M stock
Scott Levine: The skepticism that bears have toward 3M is certainly understandable, but it seems overdone. Although the company has suffered from a shrinking gross profit margin recently, it's important to take the long view.
The company's restructuring efforts have been successful, helping it to expand its net profit margin -- something illustrated by looking at the five-year average profit margin.
MMM gross profit margin data by YCharts.
Another encouraging sign is the company's improvement in managing inventory, a success that is contributing to a robust 2023 cash flow outlook. While 3M reported adjusted free-cash-flow conversion (defined as adjusted free cash flow divided by net income attributable to 3M, adjusted for special items) of 82% in 2022, management projects an adjusted free-cash-flow conversion rate of 90% to 100% for 2023.
Stepping back from the company's financials and considering the stock's valuation, investors will find that the recent sell-off has left shares sitting in the bargain bin. Currently, they trade at 9.6 times operating cash flow, representing a discount to their five-year average cash-flow multiple of 13.6. Prefer the price-to-forward-earnings ratio? It still looks attractively valued, at 11.6 times future earnings.
Lastly, for 65 consecutive years, 3M has raised its dividend -- a feat that isn't matched by many other stocks. During that time, the company has faced and overcome challenges, suggesting that the business has the resilience to transcend its current headwinds.
Should you buy 3M now?
Undeniably, there are pressing concerns with the stock at the moment, so conservative investors might want to wait on the sidelines while the company continues to execute its restructuring plan. On the other hand, for those who are more comfortable accepting risk, 3M should appeal to value and income investors alike.
