3M Reports Solid Quarter but Our Long-Term View Remains

Wide-moat rated 3M MMM had a very solid 2020 fourth quarter, with nearly of all its business divisions pacing slightly ahead of our near-term top-line expectations. This dynamic also made its way down to 3M’s segment operating profit line. 3M produced fourth-quarter revenue of $8.6 billion (against our expectations of $8.2 billion) and segment operating income of $2.1 billion (against our $2.0 billion expectations). Despite near-term outperformance, 3M’s 2021 guide is somewhat muted, in our view, though these effects largely canceled themselves out in our projections. However, we are raising our fair value estimate by $1 to $187 from $186 previously to account for time value of money, even as our long-term expectations remain relatively unchanged.

GAAP EPS came in at $2.38 for the quarter versus our expectations of $2.20. More importantly, 3M produced full-year free cash flow of $6.6 billion, well ahead of our expectations of $5.9 billion, and good for a year-over-year improvement of 23% for this all-important metric. Adjusted free cash flow conversion (or cash flow from operations over capital expenditures with adjustments for special items over adjusted net income) came in at 132% for the full-year, and 3M improved its free cash flow margin to 20.5%, good for a 380-basis-point improvement. We’re expecting unadjusted free cash flow conversion of just under 101%, in line with 3M’s historical trends.

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