3 million(NYSE:MMM) It probably won’t make the average investor a millionaire. However, there is potential for significant long-term returns, depending on the management’s successful restructuring.
It’s an attractive value because there’s a lot of room for improvement based on new CEO Bill Brown’s comments, and there’s an opportunity to build tangible improvements at 3M. Here’s how it can generate value for shareholders in the long run.
Brown talks about implementing three key priorities: generating sustainable organic growth, improving operational performance and deploying capital efficiently. As a result, 3 million investors will eagerly await the company’s Investor Day presentation on February 26, which will detail the company’s strategic vision.
That said, Brown has already provided a lot of details on what needs to be done, and the following three possibilities align with the above priorities.
3M is a business that needs restructuring for a long time. With its production and use of synthetic chemicals and the wrong earplugs for the military, years of no sales growth, long-term profit margins decline, and a health care business that takes a lot of management time and capital (more on that in a moment).
In fairness, former CEO Mike Roman undertook a restructuring effort, cutting jobs, shedding less profitable consumer product lines, and reducing facilities and management levels. The good news is that some of the benefits are already in the company’s numbers.
As you can see below, sales growth was moderate through 2024. Gains in areas such as industrial adhesives, electronics, roofing particles and advanced materials were offset by consumer safety, automotive use and home care products. Still, the improvement in the economy (mainly through measures on productivity) led to strong revenue growth in the first three quarters.
3 million
The first nine months of 2023
The first nine months of 2024
Change
Adjusted net sales
17.64 billion dollars
17.82 billion dollars
1%
Adjusted operating margin
18.2%
22%
Up to 380 basis points
Adjusted operating profit
3.22 billion dollars
3.92 billion dollars
22%
Data Source: 3M Presentations. 100 basis points equals 1%
As such, it’s fair to assume that 3M as a business already has margin improvements and much more to do.
It was always understood that the benefits would continue through 2025, even though the initial restructuring activities were mostly done (including $700 million to $900 million in payments). These actions, “these many things will be realized in time.”
Roman has also taken over the health care business. Solvent. In recent years, this segment has been the focus of 3M’s capital allocation policy, with a series of major acquisitions and divestitures, including the acquisition of wound care business Aceility. Corporate value (EV) of $6.7 billion and M*modal’s artificial intelligence business for EV of $1 billion.
Brown pointed this out last year Research and development Spending, excluding all investments related to the health care business, has been about $1 billion a year for the past few years, and is falling on a real basis (ie, after accounting for inflation), resulting in slower new product development. But now that the underperforming health care business is underperforming, Brown has an opportunity to cut some unnecessary costs and focus on 3M’s core industrial and consumer businesses. Now, it is a small and weak company.
In addition, a commitment to improving the development of new product introductions (NPIs) may bear fruit with significant investment in research and development.
Image source: Getty Images
Among the key operational improvements, Brown noted the opportunity to improve and integrate the top supply chain (3M has 25,000 suppliers, 80% of its raw materials come from a single source), reduce waste (goods sold at 5% of cost), improve 3M’s asset utilization from the bottom 50%, and overall Timely improvement of supply.
Brown points to growth rates in these areas in February, but if you’re looking for hard numbers, he believes the number of days on hand before selling (called days inventory outstanding) should be closer to 75, which is around 100 days this time and higher than its peers.
A reduction to 75 days would result in an additional $1 billion in cash flow—a significant goal to consider.
The combination of a follow-up from Roman’s restructuring and Brown’s operating improvements means 3M investors can expect some dividend expansion through 2025 and beyond. Meanwhile, the renewed focus on NPIs should improve long-term growth.
There’s no quick fix at 3M, but progressive margin expansion — and, in turn, earnings — in the coming years — bodes well for investors.
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Lee Samaha It has no place in the said shares. He has spots in the Motley Fool and recommends 3M. The Motley Fool recommends Illinois Tool Works and Solventum. The Motley Fool has Disclosure Policy.
