3M (NYSE:MMM) is an industrial manufacturing conglomerate that generates relatively little revenue from products that will be used in the battle against the novel coronavirus. Meanwhile, demand for most of its other products is likely to drop meaningfully during the current crisis, and the valuation of MMM stock is not especially attractive at this point.
When you consider these facts, it’s clear that the current hype around MMM stock is not as justified as it seems. Let’s dive a little deeper into why you should avoid it now.
3M Has Limited Exposure to the Battle Against Coronavirus
On March 10, 3M CEO Mike Roman estimated that his company could generate $250 million of revenue from selling “respiratory products” to battle the coronavirus. Roman expects the company’s revenue from these products to resemble its revenue from respiratory products purchased during the H1N1 outbreak in 2009-2010.
Globally, millions more people will likely be hospitalized during the coronavirus pandemic than the H1N1 outbreak. The hospitalization rate for those with coronavirus is much higher than for H1N1 patients. Further, demand for hand sanitizer and disinfectant, which 3M also sells, is likely to be much higher now than in normal times.
I think that, altogether, the company could potentially generate $2 billion more from its healthcare-related products than usual during the coronavirus outbreak.
But there are a few factors that have limited the positive impact of these sales on MMM stock and will likely continue to do so. First, 3M has pledged to refrain from increasing the prices on its N95 masks, which, based on media reports, appear to be its product that’s most in demand now.
Secondly, 3M’s other healthcare-related items — hand sanitizer and disinfectant — are likely very easy for other companies to replicate and probably have relatively low margins. In fact, many other companies, including liquor makers and beauty product creators, have started making hand sanitizer. Thirdly, $2 billion is a relatively small amount of money for 3M, which had total revenue of $32.14 billion last year.
Manufacturing Is Also a Problem for 3M
During the coronavirus crisis, the demand for most manufactured products has plummeted. As such, manufacturers are having a great deal of trouble obtaining supplies. The Dallas Fed’s Manufacturing Index reached an all-time low of -70 last month, which indicates the extent of the manufacturing slump. The index came in at +1 in February. Taken together, all of this means that MMM stock is not going to do well during the crisis.
Finally, 3M’s valuation is not compelling at this point; it’s trading at 15 times analysts’ average 2020 earnings-per-share estimate. That’s about average for stocks and doesn’t reflect the current struggles of the company’s industrial businesses.
The Bottom Line on MMM Stock
Higher demand for 3M’s healthcare-related products will not move the needle for MMM stock, and the rest of the company’s business will perform very badly during the crisis. Trading at 15 times analysts’ average 2020 EPS estimate and 2.5 times its sales, 3M does not have a particularly low valuation.
Given all of these points, investors should consider selling their shares of 3M.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any shares of the aforementioned companies.