Just the usual names I’ve mentioned here in tech and other sectors. Might be able to finally average down a couple as I’ve been waiting on them to see if they’d fall to levels I’ve mentioned here. I might jump back into ones that I’ve sold recently. It all depends on how far things drop.
MMM is one I’ve mentioned keeping an eye on but I think I may just keep that on the periphery of my radar if not off completely now. I wasn’t as aware of the magnitude of the potential legal liability. It’s a wide range and there’s no class. Seems like too much uncertainty which may keep it drifting lower over time. The headline risk is likely to the downside with any whopping verdicts too vs cases they actually win.
Morningstar on MMM:
No Material Surprises in 3M's Investor Day; Stock Discounted, Despite Legal Headwinds
Analyst Note | Updated Feb 14, 2022
Nothing in 3M’s 2022 investor day materially alters our long-term view of the firm. However, we are bumping up our fair value estimate by $1 per share to $192 following our review of 3M’s 10-K filing, given a greater level of funding in the company's pension and postretirement accounts. In our view, 3M hasn’t increased intrinsic value in the nearly four years since Mike Roman was installed as CEO. Nonetheless, the stock looks discounted, trading 18% below our fair value estimate. While litigation risks will make the firm’s story murky for the foreseeable future, they won’t make or break a stock call, in our view. Removing their effects only adds 5%-6% to our fair value estimate.
While 3M’s stock is no pound-the-table bargain, dividend investors may find it attractive with its 3% forward yield, which is well ahead of other industrials and the S&P 500 (1.27% for the index at year-end). Furthermore, we think the dividend is safe, given 3M’s prioritization among its capital allocation priorities and a strong balance sheet. In our view, a worst-case scenario would likely only affect the firm’s ability to repurchase its shares (which would only remove about a $1 or so in intrinsic value). Finally, we think the dividend can grow at a 6% five-year CAGR, relatively in line with the 7% EPS five-year CAGR we’ve earmarked for the firm.
Management also updated its 2022 guidance. We think its guidance for 3.5% organic sales growth, $10.40 in EPS, and $7.6 billion in free cash flow at the midpoints is readily achievable and mostly in line with what we were modeling before this announcement, excluding the impact of respirator sales. We were, however, underappreciating the headwinds related to slowing respirator sales and have made those adjustments. We were disappointed that management didn’t provide longer-term targets (it demurred, given continued macroeconomic uncertainty).
Risk and Uncertainty | Updated Feb 14, 2022
3M is exposed to several risks, including slowing organic growth and supply chain-related disruptions, some end market weakness, a slowdown in industrial production, execution risk related to its recent acquisitions of MModal and Acelity in 2019, as well as market rejection of new product introductions.
Of these risks, we think the most critical risks are ESG and litigation risks related to earplugs and PFAS, the latter of which are a class of organic fluoride-based compounds created by 3M in the 1940s. Combined, we consider these risks greater than 50%, but less than 10% to the fair value of the company from a materiality standpoint, which we've incorporated into the bull-, base-, and bear-case scenarios of our model. We point out PFAS compounds aren't easily broken down in nature, but are found in the water supply in portions of the United States and Europe. 3M originally manufactured them in everyday products like non-stick pans and fire-retardant materials, but were voluntarily phased out by the company; this process began in the early 2000s.
Nevertheless, the firm had to settle environmental suits, including against its home state of Minnesota in the amount of $850 million versus a suit that originally sought a payout of $5 billion from the office of the state attorney general. In 2021, 3M reserved $412 million related to its manufacturing sites it deemed "probable and estimable." However, we point out that this reserve does not account for product liability risks, which are significant given an association with higher cholesterol among exposed populations, with a limited association of low birth weights and immunological effects.
Our survey of prior environmental and product liability cases leads us to assume that a low- to mid-single-digit billion-dollar liability (present value) is far more likely.
As for 3M's combat arms litigation, we earmark a liability of just over $3 billion based on inflation adjusted comparable cases and the number of cases pending.
www.cnbc.com
www.yahoo.com
www.marketwatch.com
