Battered 3M Stock Still Doesn’t Look Like a Bargain

Read the full article by Al Root (Barron’s)

“3M shares are down by more than 16% so far in 2019, far worse than the Dow Jones Industrial Average ’s 14.4% gain.  Bargain-seeking investors shouldn’t rush back into the stock, though. New potential environmental liabilities threaten to erode the premium valuation multiple 3M still enjoys.

Historically, 3M stock (ticker: MMM) has traded for almost 19 times estimated forward earnings, a 25% premium to other industrial companies in the S&P 500. The company, according to conventional wisdom, is stable, with strong consumer-facing brands, such as its popular Post-it Notes. 3M is (or was), in effect, a consumer-staple-industrial hybrid.

But some of the shine is off the stock. 3M shares now trade for about 16 times next year’s estimated earnings, a mere 7% premium to other industrial companies…

And there is another growing concern for investors to consider: environmental liabilities for PFAS, or per- and polyfluoroalkyl substances. These chemicals had been manufactured for years by 3M, among others, for use in such products as stain- and water-resistant fabrics and carpeting, as well as paint, until the early 2000s. The Environmental Protection Agency now says PFAS exposure can lead to ‘adverse health outcomes.‘

During the first quarter of 2019, the company took a $235 million charge for PFAS remediation. No additional charges were taken in the second quarter, but 3M disclosed new lawsuits filed by states’ attorneys general related to drinking-water contamination. The suits name 3M, and entities related toDuPont (DD) and Chemours (CC), as defendants. A 3M spokeswoman said the $235 million charge didn’t cover new litigation.

The problem: The PFAS issue is still new, and uncertainty is high. In July, in addition to new state lawsuits, 3M received a congressional request seeking documents and information about PFAS.

3M’s liability is ‘more than $6 billion, if you just looked at cases outstanding,’ Gordon Haskett analyst John Inch tells Barron’s. ‘A total estimate of U.S. contamination and 3M’s share—cleanup and product liability—could amount to three or four times that number.’ Inch has written lengthy reports on PFAS incorporating estimates from environmental consultants.

As the year has progressed, the PFAS issue has roiled the stocks of affected companies. The total market value of such publicly traded U.S. players is down about $27 billion, or 10%, falling from $281 billion at the end of 2018 to $254 billion presently…”