3M Looks Into the Future: Long-Term Gain, but Potential Short-Term Pain

3M's (NYSE: MMM) CEO Bill Brown recently gave a presentation at the JPMorgan Industrial Conference, and his remarks contained some mixed news for investors. However, on balance, they were positive for long-term investors. Here's what happened and what it means to investors.

A mixed first quarter for 3M

Going back to the company's fourth-quarter earnings presentation in late January, management had told investors to expect the following in the first quarter:

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• Organic revenue growth in line with Q4 (2.1%)
• Earnings similar to those of Q1 2024 ($1.71)

However, at the recent JPMorgan conference, Brown told investors that organic revenue growth would be in the range of 1% to 1.5%, but there would be better-than-anticipated margin performance.

"Our earnings per share should be slightly better than what you previously expected," he said. When pressed on how earnings would beat prior guidance when sales are lighter, Brown credited it to "tight control of spending."

A double-edged sword

It's not great news for the near term. While the bottom line (earnings) will beat expectations, there's only so much reining in of spending that can be done to squeeze margin performance out of a business with weak sales. On the other hand, 3M's ability to react to events is a sign of the new operational discipline that Brown is looking to establish at 3M.

The question is whether the deteriorating sales outlook is part of a developing trend or a temporary weakness.

Why the sales outlook deteriorated

It's a somewhat complicated situation, because management said that orders would increase by more than 2% in the quarter. However, CFO Anurag Maheshwari noted that "revenue is getting elongated from the orders," meaning that sales would be light in Q1 and will move into the second quarter. Going into the details of where the weakness was, Brown highlighted manufacturing abrasives, auto aftermarket, and auto original equipment manufacturer (where 3M is overexposed to the U.S. and Europe), and notable weakness in the consumer segment, notably the "office channel" (Post-It notes, Scotch tape, etc.)

Image source: Getty Images.

Since market interest rates peaked in mid-January, it's hard to argue that this was some kneejerk reaction in early March. In fact, interest rates and, in turn, mortgage rates have come down since then, although they remain uncomfortably high.

As such, it is likely a reaction to the tariff actions planned and implemented by the current administration. They are creating uncertainty, feeding into consumers' and distributors' cautionary behavior. Notably, the particular weakness is in areas (3M's consumer and auto-related areas) that have disappointed for some time and, therefore, are where confidence is probably relatively low.

The long-term recovery at 3M continues

There's little 3M can do about its end markets. In any case, the company is only expecting 2% to 3% organic revenue growth over the full year. That said, the key to the investment case isn't really about its top line just yet. It revolves around 3M being a self-help story due to Brown's transformational initiatives. It's what makes 3M a top value stock for 2025.

Image source: Getty Images.

Brown is aiming to improve 3M's long-term growth through driving new product introductions (NPIs) while generating operational improvements. These include improving its rate of on-time, in-full deliveries to customers and its operating equipment efficiency, or OEE (percentage of time a manufacturing asset is productive), which is currently running at a low 50% rate.

These improvements should produce tangible benefits, such as reducing inventory needs to improve cash flow and significantly improving profit margins over time.

There was good news for investors here. Brown aims to grow NPIs from 169 in 2024 to 215 in 2025 (up 27%). He noted that 3M was "off to a good start" in Q1, with NPIs up "40% to 50%." The aim for OEE is to reach a high 50% rate by 2025. Serendipitously, the company's low asset utilization rate means it has some flexibility to shift production to the U.S. if the tariffs prove ongoing and increase 3M's cost of imported goods. 3M has 45 of its 110 global factories in the U.S.

Image source: Getty Images.

Is 3M a stock to buy?

The 50% run-up in the stock means it's not quite the bargain it was last year. The news of sales softening is a concern, and there's still litigation risk around its previous use of PFAS chemicals.

However, the company appears to be making operational progress, notably with NPIs. The pullback in 3M spending in Q1 shows management's improvement in controlling its operations. These are positives for the long term, and 3M is an excellent stock to buy if it dips significantly as part of a broader market sell-off.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends 3M. The Motley Fool has a disclosure policy.