Investors woke up this week to find shares of 3M (NYSE: MMM) trade lower by roughly 20%. What seemed to be a recovery is now a scary environment for 3M shareholders. However, it isn’t all bad news. The stock trading is lower due to the finalized spinoff of its healthcare unit, which now trades as Solventum (NYSE: SOLV).
Large capitalization stocks like 3M often look to diversify their core businesses to stimulate growth. After all, it isn’t easy for management teams to deliver stellar growth opportunities when running a $58 billion behemoth. Management thought spinning off the healthcare division in 3M may free up necessary capital to reinvest into higher growth areas.
Because the U.S. economy is heading into a new breakout for the manufacturing sector, 3M’s core business is still as strong as ever. With healthcare in the rearview mirror, 3M management is now looking to areas in the industrial sector and automation through artificial intelligence capabilities to deliver further value for shareholders.
The Trend is Strong for 3M’s New Cash Pile
Analysts at The Goldman Sachs Group Inc. (NYSE: GS) expressed their expectations for a manufacturing sector breakout in the U.S. economy; investors can find the complete thesis inside the bank’s 2024 macro outlook report.
Because the Federal Reserve (the Fed) is looking to cut interest rates this year, so fundamental trends could be set to further push the manufacturing breakout thesis. Traders think these cuts could come as soon as May or June this year, according to the FedWatch tool offered by the CME Group Inc. (NASDAQ: CME).
Since currencies' values tend to be tied to their interest rate curves, lower rates in the U.S. could cause the dollar index to decline.
A cheaper dollar relative to foreign currencies may make American exports more attractive, an effect seen inside February’s ISM manufacturing PMI index, as export orders expanded by a factor of 6.4%.
With new export orders leading the sector's comeback, production needs to pick up its pace to fulfill these new orders, which will draw profits for stocks like 3M.
Over the past month 3M stock outperformed the Industrial Select Sector (NYSEARCA: XLI) by as much as 20.2%.
This underperformance leaves a wide enough gap for Wall Street and Main Street to pick up on, may be the reason why analysts at Barclays (NYSE: BCS) boosted their price targets up to $107 a share, which is 15.2% higher than today’s prices.
Keeping the Growth in Mind
Investors can follow 3 M's latest quarterly financial results, where they will find that the safety and industrial segment brought home the bulk of the company's operating income.
Out of $1.3 billion in operating income, $523 (roughly 40%) came from safety and industrial. In comparison, only $372 million came from healthcare, representing 27%.
With a new cash pile, the company may choose to boost its share buyback program by facing cheap shares. With only $33 million in buybacks for 2023, most shareholder returns came from the stock’s annualized 6.5% dividend payments.
Whether by buybacks or acquisitions, management stated that this strategic spin-off will open a path for future growth in the company.
Identifying tailwinds and accelerating trends in automotive technology and the need for industrial automation, 3M could soon find a suitable company to help the manufacturing sector push out its needed production.
With China’s economy also pushing out its first manufacturing expansion in more than six months, 3M’s consumer and industrial segments may change sentiment for the stock, especially after months of scrutiny due to ‘forever chemicals’ lawsuits.
Legal settlements amounted to approximately $13 billion to be paid over the next decade. 3M’s financials show that free cash flow (operating cash flow minus capital expenditures) stood between $4.5 and $6.5 billion over the past 5 years.
With only 2 to 3 years of free cash flow, the company can satisfy these financial needs and refocus on further growth acquisitions.
The market’s attention now goes to whether 3M is still a buy today, even after the spin-off. The answer is debatable, though Forbes is not far from Barclays. Accounting for its 20% stake in Solventum, with respective growth projections in other segments, valuations for 3M fall around $105 a share, calling for roughly 13% upside.
