3M's (NYSE: MMM) recent earnings resulted in a strong, very quick share price rise from about $103 to $127. As a result, a slew of Wall Street analysts rushed to upgrade their price targets for the stock.
The reason for the stock price jump is not so much the raised guidance in the report as it is new CEO William Brown's presentation on the earnings call, and Wall Street analysts pretty much acknowledged this in their upgrades and earnings commentary.
Wall Street warms to 3M, and its new management
At the time of writing at least five analysts at Wall Street companies have upgraded price targets for 3M in the wake of the earnings report. Interestingly, Deutsche Bank's analyst upgraded to the highest target of $150 but maintained a "neutral" rating on the stock while referencing the potential for improvement at 3M. This dichotomy is a common theme among value investors. In other words, searching for a company whose operational metrics lag behind its peers and investing in them in expectation of improvement to come as management returns the company to a performance in line with its peers.
Analysts at Barclays and Argus both raised their price targets to $145, with Argus raising its rating to "buy" from "hold." The Barclays analyst also referenced Brown's immediate impact on 3M. Citi raised its price target to $133 from $100, and its analyst made specific reference to the very positive post-earnings share price move being more likely a result of Brown's commentary. Finally, Bank of America raised its price target to $143 from $120, citing confidence in 3M's operational execution.
There are no prizes for guessing that Brown's presentation was, at the least, as important as the increase in the midpoint of 3M's full-year earnings guidance from $7.05 previously to $7.15. The positive reaction to the new approach taken by the new CEO is probably a reaction to the previous management's failure to either improve 3M's growth rate or acknowledge that the company had fallen behind.
As such, let's examine what Brown said and what investors can expect from the company in the coming years.
William Brown looks to restructure
Brown acknowledged 3M's lackluster growth and called for improvement in research and development (R&D) to revitalize its new product introductions (NPIs), which are an integral part of driving product sales growth and pricing power.
In addition, he promised a range of operational improvements, including reducing supply chain complexity, rationalizing 3M's manufacturing and distribution footprint, improving cash flow generation by reducing inventory, and dispassionately reviewing its portfolio.
These comments are long overdue at 3M. For example, one of its leading shareholders wrote to former CEO Michael Roman last year, expressing dissatisfaction with management's positive statements about the company, which did not match up with performance.
Brown is in a good position
As 3M's new CEO, Brown has an opportunity to restructure the company and get it back on track fundamentally. The previous management team led by Roman has put Brown in a position to do so following the spinoff of the healthcare business Solventum and a dividend cut that frees up cash to meet legal settlements and invest in 3M.
Meanwhile, improvements in key end markets, like semiconductors, consumer electronics, and automotive aftermarket mean 2024 is likely to prove a year of recovery for 3M earnings -- the midpoint of adjusted earnings per share from ongoing operations of $7.15 implies an 18.3% increase on the $6.04 reported in 2023.
Image source: Getty Images.
If Brown can realize his aims -- there's plenty of potential to improve performance at 3M after years of underperformance -- then there's substantive upside to the share price. However, it will take time for R&D initiatives to result in NPIs, so the immediate focus is on how Brown will improve margins in the near to medium term.
That's what the investment community is focusing on, and I think Wall Street has good reason to be positive about 3M's prospects.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Citigroup 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, Barclays Plc, and Solventum. The Motley Fool has a disclosure policy.
