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Technical view: 3M Company (MMM)

Technical view

MMM is in stage #4 but attempting to create a new base (forming to stage #1). Lately the stock went from an all-time high of $250 a share to last week’s close at $87.52 a share (over 65% decline since 2017). I bought this stock for $202 a share when it first dipped thinking that this could be a great deal. 3M was a great company back then. Like other big names involved in multiple sectors (to name one Johnson & Johnson (JNJ) or Grainger (GWW)) I expected 3M to perform in a similar manner. JNJ, for example, is so widely involved in multiple trades such as consumer staples that a problem in one sector will not impact the entire company. A great example of diversification. 3M, unfortunately, was so badly mismanaged that the same diversification couldn’t protect the company from this 5-year long slump. And now, investors are asking whether MMM is a good buy or not. This, however, depends on the goal you have when thinking about buying or selling this stock. As a dividend investor, I think this company is way better value than it was back in 2017 and there are a few reasons why I think so.

1) The company’s broad and diversified structure will survive, and 3M will get over its current problems. Unless they start spinning off the good and healthy parts of the company, the problems will be solved at some point in the future. But this will take time, and, in the meantime, Wall Street will panic and predict the end of 3M (the same way they were talking about the end of JNJ multiple times in the past when they got hit with lawsuits and troubles).

2) The recent steps the management took started the improvement process. The company’s financials are becoming healthy again. Let’s just hope they will keep moving in the right direction.

3) The stock valuation is now in a very deeply undervalued territory (based on the adjusted earnings growth, the fair value of this stock for 2023 is at $136.49 and for 2025 it is at $158.24 a share). Last time the stock was this undervalued was in 2008, briefly in 2010 and in 2019. The current valuation provides a great opportunity.

4) The company pays dividends (current yield is 6.86%) and increases it every year even despite its current problems, the company generates enough cash flow to sustain the dividend. There was a rapid decline in cash flow in 2022 where the dividend got endangered, but since then cash flow started improving and it is heading in the right direction.

On the weekly chart, we can still see a continuation of the problems. There is no change in the trend. It is clearly in stage #4 and continues lower.

Technical view weekly

We can’t see any base forming on this chart yet. So technically, this trend is still strongly bearish.

The 3M’s revenue kept going higher over the years, even during its problems in 2020-2023 revenue kept growing but slowed significantly. On a one-year basis, revenue declined by 3.56%, a 2-year decline by 3.59%. A 5-year still shows a meager 0.39% growth, 10-year is at 0.49% growth. I believe investors see this and punish the stock.

Technical view weekly

As mentioned earlier, the company’s cash flow started falling rapidly since 2019 but in 2021 we are seeing improvement and growth again. Will it continue?

Technical view weekly

This chart shows the free cash flow line better (the orange line with a tiny “F” boxes):

Technical view weekly

As you can see, the cash flow is improving, and it is also expected to improve. If it will, the stock price will follow.
Here is a culprit of all the troubles:

Technical view weekly

Earnings got hit hard and the stock followed. I keep saying that what matters the most in the stock market is “earnings, earnings, and earnings.”

Since 2014, the company started piling up a huge debt and not having enough cash to sustain it. This was unprecedent for 3M. Fortunately, in 2020 the company started aggressively paying the debt off. There is still a long way to go and in the current interest rate environment, this is a burden which also weights on the current stock price:

Technical view weekly

3M pays dividends and increases them since 1970. It started increasing dividends in 2013 very aggressively. But if we look at the cash flow, earnings, and debt levels, it seems obvious that this dividend growth was not supported by the company’s earnings or free cash flow but by debt. Yes, the company may have been borrowing money to pay increased dividends and today, the stock is punished for it.

Technical view weekly

I think this is the only positive chart so far – declining shares outstanding. The company is constantly and systematically buying back its shares at 2.75% annual rate (5-year average is at 1.52%).

Technical view weekly

Employment at MMM holds steady and it started declining slowly in 2022:

Technical view weekly

I believe, at the current price, MMM is very undervalued providing a great potential for future price appreciation and collecting dividends while waiting for it to increase the price.

Technical view weekly

If the price appreciates, it may take some time. I do not expect it to happen in 2025 but over time. If we are investing in a 10 year or more time horizon, this might be a great opportunity.

Over the years, MMM beat the market. With the last few years’ declines, it is not able to do so anymore. It beats the market with dividends but not the capital growth:

Technical view weekly

Despite all the recent negative sentiment and bad financials, I do not think these are systemic issues. The company made bad decisions in the past, it is now paying for it and it is improving its balance sheets. If it keeps doing it and going in the right direction, this recent selling can be a good opportunity to make some decent profits.
I think all the hurdles will be overcome in the future and buying now could bring long-term profits. Buying slowly at the current levels should be a good contrarian opportunity.

The stock is now BUY

This post was published in our newsletter to our subscribers on Sunday, October 29th, 2023. If you want to learn more about our stock technical analysis subscribe to our weekly newsletter.


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