Investors can breathe a sigh of relief as materials giant 3M is getting closer to resolving its legal overhangs. The company is reportedly nearing a $5.5 billion settlement with regards to claims involving potentially faulty earplugs sold to the military.
According to the Wall Street Journal, this news has been well-received by both analysts and the market. RBC analyst Deane Dray expressed optimism about the settlement, stating that it is at the lower end of expectations. Importantly, he also highlighted that 3M’s balance sheet is well-equipped to handle the settlement amount.
Based on estimates, 3M should have ample liquidity, with roughly $18 billion-plus available to meet its legal liabilities. This includes cash, projected free cash flow for the second half of 2023, the Health Care spin special dividend, and the value of the remaining 20% Health Care stake that will be held by the parent company.
In addition to facing legal challenges, 3M is in the process of spinning off its healthcare division as a separate entity by the end of the year.
While RBC rates 3M shares as Sell with a $100 price target, Citi analyst Andrew Kaplowitz holds a Hold rating with a $111 price target. Kaplowitz also views the potential settlement as being at the lower end of expectations.
Kaplowitz highlighted the importance of this development in alleviating 3M’s legal burden and reducing litigation noise that has been weighing on the company’s valuation. He believes that this step could be seen favorably by investors, although he acknowledges that 3M still has work to do to fully recover.
All in all, the progress towards resolving legal issues is a promising development for 3M and may have positive implications for its future prospects.
3M: Facing Challenges and Moving Forward
3M, a renowned company, is currently grappling with legal issues related to the presence of PFAS chemicals in groundwater. However, there is some positive news as well. The company recently reached a $12.5 billion settlement with U.S. water providers for remediating the contamination. Nevertheless, 3M still faces consumer litigation concerning water pollution.
Despite these challenges, there have been some promising developments. In premarket trading, 3M shares surged by 6% to reach $104.89. Additionally, the S&P 500 and Dow Jones Industrial Average futures witnessed a modest increase of 0.1% and 0.2%, respectively.
The legal troubles have had a significant impact on the company’s stock performance. Since its peak in 2018, when shares were valued at approximately $250 each, there has been a sharp decline of about 60%. This decline has wiped out an estimated $80 billion from the company’s market capitalization. This staggering reduction demonstrates the extent to which investors have discounted 3M stock due to ongoing litigation issues.
At present, 3M stock is trading at approximately 10 times the projected earnings for 2024. In contrast, during the peak period in 2018, it was traded at around 22 times the earnings for 2019.
If the stock were to be valued at 22 times the estimated earnings for 2024, the shares would reach approximately $215 each. However, this value still falls short of the all-time highs observed earlier, which suggests that 3M’s business has encountered various struggles in recent years.
In 2018, analysts projected that 3M would earn over $11 per share in 2019. Yet, the company ended up earning only about $9 per share. Currently, Wall Street expects 3M to earn approximately $9.80 per share in 2024.