3M Company (NYSE:MMM) stock price has fallen slightly this month, even as the market has rallied, partly due to an analyst’s downgrade based on legal troubles. 3M stock has long been a defensive pick because of its positions in the consumer-products industry and respectable dividend yield.
However, 3M stock price has underperformed after RBC Capital Markets cut its rating on 3M from “Outperform” to “Sector Perform,” citing worries about the firm’s legal issues as the main reason for its decision.
When a stock like 3M underperforms on bad news, the contrarians start chomping at the bit. However before you buy 3M stock on weakness, here are three points to consider.
RBC analyst Deane Dray pointed to 3M’s ongoing legal issues regarding chemicals called perfluorooctanesulfonic acid, or PFAS, which have been linked to several illnesses.
3M has been accused of knowingly contaminating the food and water supply of the U.S. with high levels of PFAS, resulting in a slew of legal trouble with no end in sight. Because of the widespread use of PFAS, 3M could be bogged down by complaints about the chemicals’ environmental impact for the foreseeable future.
Dray says the cost of 3M’s lawsuits can’t be calculated at present because their scope is unclear, but other estimates say the firm might have to pay more than $6 billion, or roughly 6% of its overall market capitalization, to clean up the mess.
Even disregarding the uncertainty that MMM stock’s legal troubles bring to the table, the firm still looks risky. Earlier this year, 3M stock price made its way more than 10% lower after its management cut its 2019 guidance. Not only did the guidance reduction shake investors’ confidence, but it signaled somewhat of an emerging trend, as it marked the firm’s fourth guidance cut in just over a year.
There are a lot of reasons to worry about the building trend, but the biggest concern is the fact that the trend takes away the draw of 3M stock as a defensive play. A lot of investors added 3M to their portfolios because they thought it was a good name to own in case of an economic downturn. However, the more 3M struggles, the less it looks like a good bet if the market turns sour.
MMM stock’s earnings weakness isn’t coming out of the blue. Several of the firm’s key markets are on the rocks right now, which is hurting the company’s sales. 3M stock is particularly exposed to slowing growth in China; nearly a third of the firm’s sales come from the Asia-Pacific region.
On top of that, 3M is working on a restructuring program that will restructure its business into four separate units. During its first-quarter earnings call, the firm announced its plans to merge its safety and graphics business with its industrial business. The restructuring is bound to create some setbacks at 3M over the next few quarters, especially considering that several of the firm’s top executives have elected to leave at the same time.
3M stock is facing several headwinds at the moment, making it a risky bet. Chief among investors’ concerns now is the company’s exposure to litigation regarding PFAS. The bottom line on MMM stock is that no one knows exactly how far-reaching the consequences will be for 3M as more is discovered about what the company knew when using the chemicals.
There’s certainly a good contrarian case for buying 3M now, though. If there’s one thing we can count on, it’s that the public has an extremely short attention span. The list of publicly traded companies that have been in the spotlight for knowingly harming people is extensive, and the majority of those same firms are trading on top of the world right now. So, it’s not crazy to think about buying stocks when analysts start their hand-wringing over the latest scandal.
Right now, I think worries about the PFAS litigation are overdone. While there has been a lot of chatter about what 3M knew and didn’t know regarding the contamination and the negative effects of PFAS, so far, it doesn’t appear that the FDA is planning to take any further action.
The Bottom Line on MMM Stock
Of course, 3M stock still carries a lot of risk due to unanswered questions about its PFAS litigation and the slowing growth of its key markets. However, the firm looks capable of coping with these problems, and its respectable 3.48% dividend yield could take the edge of while investors wait for the dust to settle.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.
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