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Last week, 3M (MMM) reached a settlement of various lawsuits around the use of “forever chemicals” or PFAS in its products. The chemical company will need to pay out 10.3 billion US dollars at the least. The settlement will be paid over 13-years, and could reach as high as 12.5 billion U.S. dollars, depending on how many public water systems detect PFAS in their testing.
As a result of this settlement, Morningstar analyst Joshua Aguilar has reduced his fair value estimate for the 3M stock to 121 US dollars from 127 US dollars. For now, he is still maintaining his ‘Wide’ economic moat rating and Morningstar Uncertainty Rating of High. He calculates 3M’s total PFAS liabilities at about 20 billion US dollars and thinks its total liabilities will rise to about 24 billion dollars.
Shareholders will be adversely affected no matter what. 3M will have to end its share repurchase program, and it may also have to end its acquisition program and accept a more modest reality. For now, its dividends are safe, but will be in danger down the road.
While Aguilar doesn’t think 3M’s exposure reaches the heights of Big Tobacco – which incurred legal settlements greater than 200 billion U.S. dollars, he does compare it to the BP oil spill settlement. Right now, 3M is a value trap, and investors should search elsewhere for industrials exposure, because 3M’s risk/reward isn’t too attractive at current prices.
For Morningstar, I’m Ruth Saldanha
Bulls Say
- 3M continues to emphasize innovation and keeps competitors away with generous levels of R&D spending, which typically totals nearly 6% of net sales.
- The firm continues to benefit from its shared technology platforms, which are applicable to multiple use cases. Technology allows 3M to charge a 10%-30% premium for its products but also brings down its unit costs.
- 3M is likely to profit from repositioning its portfolio to faster-growing portions of global GDP, which over the long term should allow it to handily outperform the industrial production index.
Bears Say
- While 3M has earned returns that have doubled its cost of capital for over 25 years before the pandemic, gross profits over prior-year R&D spending have started to slow.
- The firm faces several challenges, including slowing respirator sales that represent an approximately $500 million sales headwind in 2023.
- Litigation risks will cripple the value of the company and remove any benefit from potential fundamental catalysts.
