3M Is Worst-Performing Dow Stock as Billions in Legal Costs Loom

3M Co.’s first-quarter plunge is scaring off even the bravest of dip buyers as its crippling legal troubles continue to haunt the century-old industrial giant.

(Bloomberg) — 3M Co.’s first-quarter plunge is scaring off even the bravest of dip buyers as its crippling legal troubles continue to haunt the century-old industrial giant.  

Shares of the company — whose products encompass everything from auto parts to Post-it notes — are down 14% in the first quarter, making them the biggest decliners in the Dow Jones Industrial Average. And only 51 of the 503 companies in the S&P 500 Index have had worse performances than 3M this year.

“This stock is currently uninvestable,” RBC Capital Markets analyst Deane Dray said in a phone interview. “It is going to be a really difficult year for the company.” 

Litigation risk is the biggest threat facing 3M, Dray said. The company is fighting legal challenges on two major issues: chemical contaminants and defective combat earplugs. Dray noted that the US Congress is likely to take more stringent measures to tackle pollution from the so-called forever chemicals, or PFAS — polyfluoroalkyl substances — some time later this year. 3M is one of the makers of the pollutant, along with DuPont de Nemours Inc., Chemours Co. and others.  

“The PFAS liability is the main reason to avoid 3M,” said Ivana Delevska, chief investment officer at SPEAR Invest. “PFAS has been weighing on the company’s shares since late 2019; but what started as few cases disclosed in the regulatory filing, could now end up being a $100 billion liability.”

Earlier this month, the Environmental Protection Agency proposed new rules for lowering the maximum contaminant levels of PFAS chemicals in drinking water — a move that, if passed, can lead to even more lawsuits for the companies involved. 

Meanwhile, 3M’s core business has also hit a rough patch. Stubbornly high inflation and fears of a recession are hitting the company’s consumer-facing lines. In January, 3M said it would cut about 2,500 manufacturing jobs due to persistent economic hurdles and forecast an annual profit that came in shy of expectations.  

The company has implemented “strict control” over its discretionary spending, Chief Executive Officer Mike Roman said during during 3M’s fourth-quarter earnings call on Jan. 24, noting that it planned to exit all PFAS manufacturing by the end of 2025. 3M declined to comment beyond that.

Dark Mood   

The company’s shares reflect this darkening mood. The stock is trading at around 12 times its forward earnings, compared with the Dow’s price-to-earnings multiple of about 17 and the S&P 500’s 18. The spread of p/e ratios between 3M and the S&P is at the widest since 2000, according to data compiled by Bloomberg. 

While estimates about the financial ramifications of the PFAS and the earplug suits vary widely, most put the total above tens of billions, albeit spread over several years. Bloomberg Intelligence’s litigation analyst Holly Froum said that for the chemicals cases, remediation may cost about $30 billion to $35 billion, payable over 30 years, while for the earplugs suits she expects around $5.5 billion to $9.5 billion in costs.  

Meanwhile, Wall Street analysts’ average profit estimate for 3M has dropped 17% over the past three months, while their revenue expectations have retreated 6% over the same period. BI industrials analyst Karen Ubelhart said the lack of clarity around the legal issues make it hard to calculate their possible impact on earnings, leading to further uncertainty.

With everything swirling around the company, analysts have largely moved to the sidelines, with 14 recommending holding the stock, six advocating selling, and just one suggesting investors buy it. That would be Morningstar’s Joshua Aguilar, whose estimates for legal costs are below the Street average. 

But while Aguilar believes the shares are pricing in a much-bigger impact from litigation risk, he says there are better investments in the industrials sector. 

“What you can’t have is litigation risks as well as poor operating results, and unfortunately they have both,” Aguilar said. “Fear has taken over the narrative.”

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