This pandemic-induced recession has been unlike any other period in America. The layoffs and unemployment have been worse than anything seen in about 90 years, and things would have been worse without the instant economic stimulus and enhanced unemployment benefits that were put in place. The recession may have helped some of the technology and cloud companies considerably, but the fallout in the basic economy has been particularly difficult on industrial companies and companies that have conglomerate business models.
3M Co. (NYSE: MMM) was having earnings issues long before the recession arrived, but the company reported that sales in each of its segments declined in the second quarter. Quarterly sales were down about 12% year over year, even though the company noted that they were up by a like amount in June. While analysts differ somewhat on 3M’s prospects, a recent trend has been too big to ignore. Its stock price now has risen for eight consecutive days, and that has come with a gain of nearly 11% in that time alone, even though the stock is still actually down so far in 2020.
Analysts have a mixed rating history on 3M due to a streak of disappointments. Credit Suisse recently reiterated its Outperform rating after earnings but cut the price target by a dollar a share to $179. Morgan Stanley raised its price target from $160 to $166 after earnings, while it only maintained an Equal Weight rating.
While 3M shares have risen handily in August, the stock chart on 3M peaked right under $170 in early June. That level also happens to coincide with where 3M shares were trading after the first major gap-down after its January earnings report took the stock down from a prior $180 level. On a dividend-adjusted basis, 3M closed out 2019 at $173.12.
3M is an obvious winner in health care products under the COVID-19 pandemic. In fact, 3M should have just been guaranteed orders for as far as the eye can see in personal protective equipment and other basic health care products. Where 3M suffers is in its sales of basic products to corporations, and sales of many products remain challenged in the recession. The corporate update about July sales data showed the following breakdown after a 6% total gain to $2.8 billion:
Healthcare up 29% (up 11% organic local-currency)
Consumer up 9% (same in local-currency)
Safety, Industrial up 6% (up 8% in organic local-currency)
Transportation, Electronics down 7% (down 6% in organic local-currency)
Americas up 10% (up 6% in organic local-currency)
Europe, Middle East and Africa up 3% (flat organic local-currency)
Asia Pacific saw flat sales (down 1% in organic local-currency), including China up 13% and Japan down 12%)
What was interesting is that 3M did not make any changes to its guidance for the third quarter of 2020. These times are still quite challenging for corporate managers to issue forecasts.
Trying to call a bottom in 3M has been a challenge. The company has disappointed with earnings for long enough that the bias with some investors is quite sour. On August 6, 3M was included as one of five bargain-bin industrial stocks, and that was before the bulk of this last run higher was seen.
3M also was recently valued at about 17 times expected 2021 earnings, but that needs an admission that trying to forecast earnings for 2020 and 2021 is almost like trying to predict what a fortune cookie will say. At 80% of fiscal 2019 earnings of $7.92 per share, the stock’s multiple is closer to 25 times for 2021.
While a chart from StockCharts.com has been provided below, here is the trading history behind the eight days of continual stock price gains:
- Aug. 13, 2020, $166.30 (not yet closed)
- Aug. 12, 2020, $164.26
- Aug. 11, 2020, $163.38
- Aug. 10, 2020, $161.44
- Aug. 07, 2020, $158.33
- Aug. 06, 2020, $156.00
- Aug. 05, 2020, $155.35
- Aug. 04, 2020, $151.21
- Aug. 03, 2020, $150.41
- July 31, 2020, $150.47
- July 30, 2020, $152.12
- July 29, 2020, $156.25
- July 28, 2020, $155.33
If Thursday’s eight-day streak of gains holds, this will mark the longest winning streak since November of 2018 when it posted a nine-day streak of gains.
3M’s gain in the mid-day trading period was up 1.2% at $166.30, but the stock was up more than $1.00 higher earlier in the morning. 3M’s 52-week range of $114.04 to $182.55 shows just how challenging it has been, but what that range does not indicate is that 3M’s stock peaked at just above $250 back at the very start of 2018. 3M still has a dividend yield of 3.5%.
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