3M (MMM): Buy, Sell, or Hold Post Q1 Earnings?

Yahoo

3 days ago

Over the past six months, 3M has been a great trade, beating the S&P 500 by 11.4%. Its stock price has climbed to $151.90, representing a healthy 17.1% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy 3M, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it's free.
We're happy investors have made money, but we don't have much confidence in 3M. Here are three reasons why you should be careful with MMM and a stock we'd rather own.
We can better understand General Industrial Machinery companies by analyzing their organic 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).
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 3.4% and 5.5% 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.
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. Unfortunately, 3M's ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3M falls short of our quality standards. With its shares beating the market recently, the stock trades at 19.5× forward P/E (or $151.90 per share). This valuation tells us it's a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We'd suggest looking at our favorite semiconductor picks and shovels play.
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