“Baron Business Week” reported that 3M (MMM-US) has been making big moves recently, trying to reverse its poor stock performance, but investors should remain vigilant.
3M’s stock price has underperformed in recent years, falling about 45% since peaking at nearly $260 in 2018, due to declining profitability and multibillion-dollar lawsuits.
The company began dealing with those issues this week, and after reporting its second-quarter earnings on Tuesday, the stock surged 4.9% and continued to rise 2.04% on Friday to close at $143.24 per share, but is still down more than 19% so far this year.
While earnings data was not good and management revised down its full-year profit forecast, citing a stronger dollar and unclear macroeconomic conditions, at the same time, 3M announced plans to spin off its health care unit and revamped it due to Combat The Aearo Technologies subsidiary, which is involved in a lawsuit over badly designed Arms earbuds, has filed for bankruptcy protection, after which the proceedings are expected to be terminated. 3M will set up a $1 billion trust fund to compensate servicemen with hearing loss caused by wearing the faulty earplugs.
Citi research analyst Andrew Kaplowitz said it would be a long-term positive for 3M to limit its Combat Arms earbud lawsuit to $1 billion by filing for bankruptcy of its subsidiary.
3M’s plan to unlock value by divesting its healthcare unit seems plausible. Calculated based on estimated earnings in 2023, 3M’s current stock price-earnings ratio is about 13.1, which is much cheaper than the S&P 500’s 16.8 price-earnings ratio, and its own 5-year average stock price-earnings ratio of 18 is also much lower.
What’s more, the medical equipment and services stock is trading at a price-to-earnings ratio of about 18, so the company could be expected to command a higher valuation once it gets out of the way.
However, 3M’s strategy to file for Chapter 11 bankruptcy protection for Aearo raises bigger questions: Will it stand up to legal scrutiny, and will $1 billion be enough to cover all claims? The $1 billion trust fund pays only $5,000 per hearing-impaired service member, a lawyer representing the service members said. One plaintiff, Joseph Sigmon, said angrily: “Will 3M CEO Mike Roman be willing to lose his hearing for $5,000?”
3M faces claims from more than 290,000 victims and has so far paid about $265 million to 13 plaintiffs. Carl Tobias, a law professor at the University of Richmond, pointed out that 3M may spend a year trying to resolve several Combat Arms earplug cases, and when these lawsuits are completed, investors, parties and companies can compare the various relevant data.