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3M: Combat Arms Potential Settlement and Recent Appointments Are Key Wins for Shareholders

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Various reputable media outlets report that 3M MMM is nearing a roughly $5.5 billion settlement related to its Combat Arms earplugs. Consequently, we don’t expect to materially change our $131 fair value estimate, if at all. In fact, the nearly $5.5 billion figure is very close to our $4.9 billion estimate, and well below the market estimates we’ve seen floating around of $10 billion-$15 billion for Combat Arms. Even so, it’s still materially more than the $1 billion settlement trust 3M had initially proposed to resolve these issues.

We think news of the potential settlement figure is a big win for the company and its shareholders, particularly after it lost 10 of its 16 bellwether cases. Nonetheless, we retain our Very High uncertainty rating, for now, because of the lack of visibility pertaining to lingering liabilities over chemicals known as PFAS. These liabilities exclude environmental liabilities outside of the recent $10.5 billion-$12.5 billion settlement related to municipal drinking water. They also exclude personal injury suits, property damage, and non-U.S. suits. That said, we think the municipal drinking water system settlement could be the biggest hit 3M may take related to PFAS.

For now, we disagree with some analysts who claim that the settlement amount could merit negative credit rating activity and substantially higher leverage for 3M. Our assessment depends on the speed of potential payments, but we expect 3M will successfully extend these payments over a period of years, like the PFAS municipal water payments. If our assessment is correct, and these payments extend over five years or so, then 3M wouldn’t need to take on substantial additional leverage (or more leverage than it already has) to service its obligations. Our assessment also presumes 3M will tender its settlement payments to municipal water systems over 13 years, beginning next year. Said differently, we think the balance sheet can readily absorb this blow.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Joshua Aguilar

Director of Equity Research, Resources
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Joshua Aguilar is the director of resources equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Aguilar joined Morningstar in 2016 as an associate on the financials team, and he was promoted to analyst on the industrials team in 2018 and to senior analyst in 2022. He has served as associates coordinator since 2021 and led Morningstar's diversity efforts as DEI co-chair since 2020. Aguilar has been a mentor to several associates on their paths to becoming analysts. He also has hosted a Morningstar earnings town hall, participated in analyzing Morningstar stock, and been a strong contributor through both client interactions and his General Electric stock call. Aguilar co-authored an Outstanding Research Achievement-winning piece with colleague Kris Inton on CEO compensation in 2021. He also has taught Morningstar's model to new hires for many years as part of the valuation committee.

Before joining Morningstar, Aguilar was a practicing business transactional attorney in Florida. He graduated magna cum laude with a bachelor's degree in political science and criminology from the University of Florida. He also has a Master of Business Administration from Rollins College and a Juris Doctor from Wake Forest University.

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