3M(NYSE: MMM) has quietly emerged as one of the market's biggest turnaround stories, with the shares up almost 40% this year, back to their highest level since early 2022.
Following a difficult post-pandemic period defined by supply-chain disruptions and inflationary-cost pressures, the latest update from the industrial conglomerate was highlighted by a growth rebound and wider profit margins.
The headlines are positive, but does that make 3M stock a buy now? Let's explore what the data suggests.
A return to profitable growth
The story of 3M's comeback is one centered on impressive financial and operational execution. The company reported second-quarter adjusted earnings per share (EPS) of $1.93, coming in well ahead of the average Wall Street estimate and up 39% from the $1.39 result last year. Adjusted sales of $6 billion climbed by 1.2% year over year on an organic basis.
Even as management continues to cite persistent consumer-spending headwinds, industrial end markets are steadier. The transportation and electronics segment has been a strong point, capturing demand for specialized semiconductor-industry applications, while also benefiting from the launch of new products geared toward electric vehicles.
An internal restructuring program implemented during the past year through cost savings and efficiency efforts appears to be paying off. The adjusted operating margin this quarter reached 21.6%, a 440 basis point improvement from 17.2% last year.
The results were good enough for management to hike its full-year earnings projection. 3M is now targeting 2024 EPS of $7 to $7.30, up from a prior midpoint estimate of $7.05, and $6.04 in adjusted EPS from continuing operations in 2023.
Image source: Getty Images.
A foundation for long-term growth
There's a sense that this rally from 3M, globally recognized for brands like Scotch Tape and Bondo, has some staying power, which is great news for investors.
The company's diversified profile, covering product categories from advanced materials, personal protective equipment, office supplies, and home care items, is part of the attraction of the stock as a high-quality investment opportunity.
An outlook for organic revenue growth this year in the low-single-digit percentages isn't necessarily exceptional -- except in the context of still-volatile macroeconomic conditions. By this measure, 3M is proving its resiliency and ability to navigate a shifting operating environment.
Ultimately, the bullish case for the stock is that 3M is well positioned to emerge even stronger when top-line demand recovers in consumer end markets and the traditionally high-growth regions like China that have been softer. A strategy to continue innovating with more value-added products and optimizing pricing while maintaining a strong balance sheet supports a positive outlook.
In terms of valuation, 3M shares are trading at forward price-to-earnings ratio (P/E) of 17. This level stands out as attractive next to a peer group of industrial-sector leaders like Honeywell International, DuPont de Nemours, and Dow, which trade at a higher average-earnings premium closer to 20.
MMM PE Ratio (Forward) data by YCharts.
There is a case to be made that even following the recent rally, 3M remains undervalued given its newfound financial strength. Keep in mind that the stock also offers a compelling $0.70 quarterly dividend, which yields 2.2% on a forward basis.
Room to stay bullish on 3M stock
I believe 3M stock deserves a buy rating. The company has delivered a strong start to the year with some optimism for the success to continue. Monitoring points over the next few quarters include organic-sales trends, cash flow, and margins.
As long as macroeconomic conditions remain resilient, the expectation is for 3M to grow and consolidate its market share. For investors with long time horizons, a small position in the stock could work in the context of a diversified portfolio.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
