3M Stock Bulls Prepare to Pump the Brakes Ahead of Earnings Gauntlet

Business Insider

5 hours ago

3M Company (MMM) is a leading industrial powerhouse, but recent years have tested its resilience. Legal battles, rising costs, and restructuring efforts weighed heavily on its performance, causing shares to fall sharply over a prolonged period in the last five years. More recently, the stock has been finding its footing again, with the rebound driven by a diminished perception of risk and signs of returning growth. The past year's price action shows 3M outperforming the S&P 500 (SPX), but there may be trouble ahead.
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As MMM approaches its Q2 earnings report, scheduled for July 18, investors are eager to see if the turnaround story will continue strongly or if challenges remain too significant. The key question is whether 3M can sustain growth amid ongoing headwinds—from tariff impacts to lingering legal uncertainties—and justify its current valuation premium.
I'm taking a cautious stance, rating 3M as a Hold ahead of earnings precisely because the outlook remains unclear. It's hard to confidently predict a consistent growth trajectory without major interference from macro headwinds.
Rating 3M's Operations
When we look at a capital-intensive business like 3M—a company producing a vast range of products and operating numerous plants, labs, and pieces of equipment worldwide—it's clear that efficiently managing investments and turning them into operating profits is key to creating value for shareholders.
For example, by taking the company's operating income (EBIT) and dividing it by its net working capital (the money tied up in inventory, receivables, and payables that are essential for daily operations) plus the physical value of its assets (Property, Plant & Equipment), we get a return on investment metric that makes sense for a capital-heavy business like 3M.
Right now, based on EBIT, working capital, and PP&E over the last twelve months, 3 M delivers an ROI of around 29%. On the surface, that looks solid—especially compared to an estimated weighted average cost of capital (WACC) of about 8%—but it's still well below the ROI of above 40% that the company consistently delivered four or five years ago.
Coincidentally, 3M shares dropped over 50% from their mid-2021 peak to early 2024, only recently recovering to levels seen five years ago. The primary drivers of this decline have been ongoing litigation and escalating legal costs— particularly related to PFAS contamination (the so-called 'forever chemicals') and earplug lawsuits—which have added billions in potential liabilities, significantly impacting EBIT and increasing operating expenses.
As a result, transformation initiatives have become unavoidable. In recent years, 3M has been actively restructuring and simplifying its portfolio, but that also comes with upfront charges, write-downs, and investments in new technologies. On top of that, the post-COVID surge in raw material costs, plus transportation and labor headwinds, has added even more pressure to the company's margins.
A Closer Look at Latest Turnaround Developments
The good news is that the market seems to be betting on a turnaround at 3M, especially with shares back near the $160 level again. In the most recent quarter (Q1), 3M posted organic revenue growth of 1.5% year-over-year, while expanding adjusted operating margins to 23.5%—an increase of 2.2 points year-over-year and already above the pre-pandemic level of 19.2%.
In fact, based on the updated 2025 guidance, management was encouraged by the strong start to the year in Q1. They reaffirmed their outlook for organic sales growth of 2% to 3% —at or above macro trends —and EPS between $7.60 and $7.90, driven by margin expansion and an estimated conversion of about 100% of its earnings into free cash flow.
Looking further ahead, long-term EPS growth points to a 5-year CAGR of around 6.6%, which is slightly lower than six months ago, when the same period was expected to see a CAGR of 6.9%. At a similar pace, the 5-year revenue CAGR is now estimated at 3.9%, just a bit softer than the 4.1% forecast earlier this year.
I would attribute these more cautious revisions mainly to the impact of tariffs. As management highlighted in Q1, tariffs are expected to have a $850 million annual impact, which could shave about $0.20 off EPS. On top of that, there's the ongoing drag from legal uncertainties, like the billion-dollar settlements tied to PFAS and earplug lawsuits, which continue to drain cash and require additional provisions.
As Q2 results approach, the numbers to beat are an estimated EPS of $2.01 (up 4% year-over-year) and revenues of $6.1 billion (down 3% year-over-year). However, historically, it's the annual guidance that's often the primary driver of post-earnings sentiment.
In this case, management's tone has been cautious, signaling that the solid Q1 performance might not carry through to full-year results, with tariff risks, softer GDP, and global auto production potentially weighing on projections.
That's why I'm somewhat uneasy with 3M trading at roughly a 15% premium to the sector, based on a forward EBITDA multiple of 13.5x —nearly 20% above its own five-year average. Viewed through an earnings yield lens—using operating profit divided by enterprise value (a helpful measure for capital-intensive businesses)—3M's trailing figures translate to an earnings yield of about 4.5%, based on $4.15 billion in operating profit and a $91.1 billion enterprise value. That falls short of a reasonable weighted average cost of capital (WACC), even under optimistic assumptions.
Put simply, the company's operating return doesn't adequately justify its risk and cost of capital. For an industrial blue chip still facing significant legal overhangs, I believe a 6%–7% earnings yield is more appropriate to compensate for that added risk. Reaching that level would most likely require a reduction in enterprise value, rather than a dramatic improvement in operating profit.
Is 3M a Buy, Hold, or Sell?
Although Wall Street's consensus is mostly bullish, there's still plenty of room for skepticism around the investment case. Of the 11 analysts covering the stock over the past three months, six are bullish, three are neutral, and two are bearish. MMM's average stock price target stands at $155.36, which implies ~1.5% downside from the current share price.
Uncertainty Lingers for MMM Amid Legal Risks and Lofty Valuation
I'd say the outlook is still pretty opaque for 3M heading into its Q2 earnings. The growth and synergies from the turnaround, in my opinion, just don't put enough certainty behind the risks of betting on a business that could still disappoint on growth—while facing bigger legal and tariff headwinds—all while trading at what might be stretched multiples.
That said, I'm keeping 3M rated as a Hold for the time being. Given tepid consumer demand and ongoing macro pressures, it's still very uncertain whether the company can do more than just beat estimates—in other words, actually raise guidance.