3M(NYSE: MMM), Carpenter Technology(NYSE: CRS), and Owens Corning(NYSE: OC) are vastly different stocks, but all three are attractive on a risk/reward basis. They each have a different investment case, so let's explore why they might suit a value investor's portfolio.
3M is undervalued
This industrial giant isn't the highest-quality company out there. After all, mediocre growth, declining margins, and costly legal issues have dogged the company in recent years, not to mention question marks around the sustainability of its dividend.
That said, improvement is on the way. First, there's more clarity on the high-profile legal issues, polyfluorinated substances (PFAS), and combat arms earplugs, and investors understand the payments needed to be made over many years. Meanwhile, management's restructuring program appears to be generating margin expansion. The bullet has been bitten, and 3M's dividend will be cut, freeing up resources to meet legal settlements, restructure the business, and invest in growth. There is also $7.7 billion in cash payments from the Solventum spinoff, and 3M retains a 19.9% stake in the company, worth about $2.3 billion at the current price.
Wall Street expects 3M to generate $10.8 billion in free cash flow (FCF) over the next three years. Coupled with the cash resources discussed above and the reduced dividend payout requirements (40% of FCF), 3M will have enough cash to meet its aims. Trading on an enterprise value (market cap plus net debt) of less than 9 times its estimated earnings in 2024, the stock looks like a good value as a recovery play, especially as some of its end markets, including electronics and semiconductors, appear to be bottoming in 2024.
Carpenter Technology: Buy high and sell higher
This company is an aerospace-focused producer and distributor of premium specialty alloys. Its stock price is up 104% over the last year and 45% so far in 2024 -- facts that might make investors balk at buying the stock. However, stock prices don't have any memories, and I think the stock remains a great value.
Carpenter is a company with relatively high fixed costs, meaning that its profit margin collapses when its revenue does but can return violently when its end markets turn up, as they are now. The chart below illustrates this dynamic graphically, showing actual operating profit and FCF margins alongside the Wall Street analyst consensus for 2024 to 2026.
Data source: marketscreener.com; chart by author.
The confidence in Carpenter's revenue growth comes from its broad-based exposure to the commercial aerospace original equipment manufacturer (OEM) market and aftermarket as airplane production ramps and flight departures continue to grow. Around 57% of its sales go to aerospace and defense, with about 15% going to another highly attractive market: longer-lasting implants for an aging population.
Turning to the valuation issue, the rapid recovery in earnings and FCF means Carpenter trades at 15.5 times the estimated FCF in 2025 and just 13.3 times the estimated FCF in 2026. If you believe the commercial aerospace recovery has legs, Carpenter's stock looks to be an excellent value.
Owens Corning
This building and construction products (roofing, insulation, and composites) company is facing challenging market conditions in 2024. That's unsurprising given its heavy focus on the North American residential housing market. Relatively high interest rates are pressuring the housing market, impacting stocks like Owens Corning.
However, history suggests that the housing market will improve when the interest rate cycle turns, and it often makes sense for financially strong companies to make acquisitions when the market looks to be at its worst.
That's the rationale behind the company's agreement to buy residential door company Masonite International. Suppose Owens Corning can generate the intended $125 million cost synergies from the integration of Masonite. In that case, it will end up paying just 6.8 times estimated 2024 earnings before interest, taxation, depreciation, and amortization (EBITDA) for the company.
Image source: Getty Images.
Moreover, if interest rates are heading lower toward the end of 2024, then the market will start pricing in a recovery in the housing market in 2025 and beyond. Buying Owens Corning stock, trading at less than 12 times its estimated 2024 earnings, makes a lot of sense.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends 3M, Owens Corning, and Solventum. The Motley Fool has a disclosure policy.
