Wide-moat rated 3M (MMM) had a solid third quarter that we think the market failed to appreciate. While we were initially frustrated by the company’s inability to meet its guide in multiple quarters pre-COVID-19, we think the stock is finally making a turn. The company is running decently ahead of our prior revenue forecast, and well ahead of our prior earnings free cash flow forecast. We now expect $31.8 billion of sales in full-year 2020, adjusted EPS of $8.56, and free cash flow (cash flow from operations less capital expenditures) of $5.9 billion, even with an elevated free cash flow forecast. As a result, we raise our fair value estimate to $180 per share, from $166 previously (or about a 7% raise, net of time value of money impacts). It is our hope that the company continues to deliver on growth once again and re-earn both its premium multiple and reputation as a reliable short-cycle business, whose stocks are best to buy in the early parts of the cycle.
While we’ve been wrong before when calling an inflection, we believe COVID-19-related tailwinds in certain high-impact businesses like personal safety equipment, home care, home improvement, and to a lesser extent, separation and purification, can build a sliver of a margin of safety in the stock along with its 3.7% dividend yield. We also like the addition of Monish Patolawala. Our conversations with him give us confidence he can be a valuable partner to CEO Mike Roman. One thing that gave us confidence was his belief that 3M should commit to certain capital projects with greater focus (rather than, in our words, trying to be the end-all, be-all for every single customer).
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