3M has been treading water for the past six months, recording a small return of 2.2% while holding steady at $136.46. However, the stock is beating the S&P 500’s 7.7% decline during that period.
Is now the time to buy 3M, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Despite the relative momentum, we're sitting this one out for now. Here are three reasons why you should be careful with MMM and a stock we'd rather own.
Why Do We Think 3M Will Underperform?
Producers of the first asthma inhaler, 3M Company (NYSE: MMM) is a global conglomerate known for products in industries like healthcare, safety, electronics, and consumer goods.
1. Core Business Falling Behind as Demand Plateaus
Investors interested in General Industrial Machinery companies should track organic revenue in addition to reported revenue. This metric gives visibility into 3M’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, 3M failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests 3M might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for 3M, its EPS and revenue declined by 3.8% and 3.7% annually over the last five years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, 3M’s low margin of safety could leave its stock price susceptible to large downswings.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, 3M’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
3M doesn’t pass our quality test. Following its recent outperformance in a weaker market environment, the stock trades at 18.1× forward price-to-earnings (or $136.46 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Would Buy Instead of 3M
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