3M's stock heads for 15-month high as analyst says it's no longer a 'leaky boat'
By Emily Bary
HSBC upgrades the stock, citing a compelling valuation and the potential for earnings upside
3M Co.'s latest earnings report continues to resonate more than a week later, helping to spark an upgrade by HSBC Global Research on Friday.
HSBC analyst Wesley Brooks boosted his rating on the industrial stock to buy from hold, cheering the "inflection" he saw in 3M's (MMM) most recent numbers - a trend he attributes in part to margin benefits on the heels of the company's restructuring.
While revenue growth was still sluggish at 0.5%, Brooks flagged a 4% improvement relative to a year earlier in the company's margin of earnings before interest and taxes, or Ebit.
See also: 3M's stock surges toward a 14-month high after profit, sales beat expectations
Brooks also sees conservatism in the company's current forecast, which reflects the recent separation of the Solventum healthcare business. 3M now models $6.80 to $7.30 in full-year adjusted earnings per share, for example, while Brooks expects the company to come in at the high end of that range, with his estimate at $7.29.
In looking at its remaining business absent Solventum, Brooks thinks 3M is "still a quality company" that's capable of delivering "historically high and relatively stable EBIT margins."
The company "had begun to resemble a leaky boat" over the previous three years as it dealt with muted growth prospects, supply-related complexities and various legal battles, he wrote.
"After the completion of the spin-off of 3M's Healthcare operations, Solventum, on [April 1] and the reset of its dividend to a more manageable level, we believe the risk-reward on 3M's shares is now skewed to the upside," Brooks said.
That doesn't mean 3M has moved past "every problem," but Brooks is nonetheless encouraged by factors like a more solid balance sheet that gives the company better freedom for stock buybacks.
3M shares are trading at 11.4 times earnings estimates for 2025, a multiple Brooks says "does not fairly reflect the quality of 3M's franchise."
Shares of 3M were trading up 2% on Friday afternoon and tracking toward a 15-month closing high.
-Emily Bary
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05-10-24 1508ET
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