3M Defies Its Critics With a Strong First Quarter

Wide-moat rated MMM posted solid first-quarter results in its first good quarter in recent memory. The firm outperformed sell-side Pitchbook consensus estimates, yet it performed in line with our full-year and consensus high 2020 expectations across nearly all its portfolio. We model each of 3M’s 26 business divisions when we construct our five-year outlook, and we’d loosely say 90% or so of 3M’s businesses performed according to our expectations, based on both results and the narrative we heard on 3M’s first-quarter call. We’re certain there will be puts and takes to our model as the year progresses (like at the margin level in Safety and Industrial, which is performing ahead of expectations, as well as Healthcare, where margins are trailing our near-term expectations); nevertheless, we’re not changing our $170 fair value estimate, particularly as management is taking some cost-out actions in the second quarter it expects will provide it with cost savings of $350 million to $400 million, with minimal headcount interventions.

We did, however, moderate our capital expenditures expectations and suspended repurchases in our model commensurate with management’s commentary on the first-quarter earnings call, but the effect on value was mostly negligible. We disagree with some sell-siders who’ve commented that the dividend could be in jeopardy, but given the difficult environment and the unpredictable nature of 3M’s PFAS liability, we understand it was probably prudent to stall share repurchases (though it illustrates why we don’t care for regular buybacks because they’re often made at inflated prices relative to intrinsic value). And while our GAAP EPS assumptions held constant, we did slightly bring down our adjusted EPS by six cents or so to $8.72 given a non-recurring $39 million litigation tax credit tailwind (net of other litigation charges), arising out of its PFAS environmental settlement with the State of Minnesota back in 2018.

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