3M is a dog of the Dow -- and it may not get better in 2020

Posted December 19, 2019 7:16 a.m. EST

— Investors apparently haven't left themselves too many Post-its to remind themselves to buy 3M stock. Shares of the 3M are down nearly 12% this year.

That makes the St. Paul, Minnesota-based conglomerate, which also makes ACE bandages, Scotch tape and a variety of industrial products, one of the "dogs" of the Dow Jones Industrial Average. It's the second-worst-performing stock in the Dow this year. Walgreens is the only company that has dropped more than 3M.

3M warned in October 2018 that trade tension with China would be a problem, and it's only gotten worse since then.

In April, the company's stock plunged 13% — its worst one-day fall in 30 years — after the company said the combination of weakness in China and a strong US dollar was wreaking havoc on sales and earnings. 3M lowered its outlook at the time and said it was cutting 2,000 jobs.

But in late July, when the company reported second quarter results, 3M executives said they were hopeful business conditions were finally starting to turn around.

Investors don't seem to believe them. Wall Street analysts have cut their consensus earnings estimates for 2020 over the past few months, even though the United States and China have finally reached a "phase one" trade deal.

Environmental woes could lead to a big legal bill

Citi analyst Andrew Kaplowitz downgraded 3M earlier this month, citing worries about possible environmental and health risks associated with polyfluoroalkyl chemicals (PFAS) that used to be in ScotchGard and other 3M products.

3M said in September it is committed to working with the government and supports more regulations and research to address concerns.

"These initiatives build upon 3M's long track record of industry leadership to enhance the sustainability of its products, even while the weight of scientific evidence does not establish that PFAS cause any adverse human health effects at current or past levels typically found in the environment," 3M said in September.

But Kaplowitz said in a report that "potential long-term PFAS-related liabilities could continue to weigh on valuation" for 3M. In a worst case scenario, he predicted that the legal costs could be as high as $70 billion and that "ultimate 3M liability would likely be paid over many years or potentially over multiple decades."

PFAS compounds "have emerged as a potential environmental hazard" and that there are still "detectable levels (including, importantly, in drinking water) in a widespread range of locales nationally," according to RBC Capital Markets analyst Deane Dray.

Dray said the combination of the "overhang from its PFAS liabilities and the loss of investor confidence following its recent string of guidance cuts" is a reason why he lowered his 2020 earnings estimates.

Congress has yet to deem PFAS as a "hazardous substance." But Dray did not rule out the chance that the House will do so "in the near future," a move that could be bad news for 3M and other chemicals companies such as Chemours and DuPont.

3M is a mostly unloved stock: Only two analysts have 3M rated as a "buy," according to Refinitiv.

One of them, Credit Suisse's John Walsh, said in a report earlier this month that even though "there is still market uncertainty going into 2020 ... the company will see continued benefits from restructuring savings."

Following a recent chat with 3M president and CEO Michael Roman, Walsh said he came away with the impression that the company's automotive and electronic technology segments — as well as exposure to China — will drive growth over the long haul. Still, he conceded that "broadening PFAS litigation" is a risk.

And that appears to be the reason why a dozen analysts still have 3M pegged as a "hold" — which is typically a nicer way of saying that it's time to sell. And five 3M analysts are recommending an outright "sell" on the stock. The consensus price target on the stock is $170.50 — just 1% above its current price.

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