3M is adrift & there’s no easy solution

What is going on at 3M Co? Shares of the maker of Post-it notes, automotive parts and Nexcare bandages have slumped about 25% since Michael Roman was named chief executive officer in March 2018. That ranks 3M among the top-10 worst performing S&P 500 industrial stocks over that period. To put that in perspective, consider that five of the other biggest laggards are US airlines, whose shares have yet to recover from their Covid slump, and another is Boeing Co, which is still grappling with both the pandemic and the fallout from the 737 Max crisis. Even General Electric Co, for all of its many challenges over the past few years, has outperformed 3M over this period (its longer-term showing is still worse). As recently as late 2017, 3M traded at a 30% premium to the S&P 500 industrial benchmark on a forward price-earnings basis; it now trades at a more than 30% discount.
A potentially mammoth liability tied to 3M’s legacy manufacturing of per- and polyfluoroalkyl substances (PFAS) — certain types of which are known as forever chemicals because they accumulate in the body and break down slowly in the environment — is still open-ended, and that lack of visibility has been an anchor on the shares. It would be oversimplifying things to
attribute the stock’s underperformance to that alone, though. Earnings disappointments have become a pattern. 3M warned it would come in at the low end of its fourth-quarter sales forecast, citing supply-chain challenges and a slow recovery in elective healthcare procedures.
Despite investing barrels of money into capital expenditures and research and development, 3M’s revenue growth is fairly average over the longer term, according to data from Melius Research. Gross margins are high but moving sideways. 3M increasingly comes across as overly bureaucratic and out of step with better-run peers.
Some of that may be a reflection of management missteps and communication issues. But it also seems as if 3M’s sprawling business model is no longer working as it used to.
“I’m a long-term guy, but long term can’t be a crutch for consistently missing. They’ve been stuck for years,” Joshua Aguilar, an analyst at Morningstar, said in an interview. “Perhaps there are too many end markets,” he said.
“Conglomerates work until they don’t, and some of these markets are clearly not working for them.”
Most industrial giants have taken significant steps over the past decade to streamline their myriad businesses. Even those that are still reasonably diversified, such as Honeywell International Inc or Emerson Electric Co, are much simpler than they used to be. GE, the ultimate conglomerate, is now embarking on a three-way split.
3M stands out as the exception. The company has four main divisions, but those house roughly two dozen sub-segments.

—Bloomberg