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🏭 Are 3M’s Liabilities Overshadowing Its Growth?
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🏭 3M: Liabilities Or Growth?
Shares of industrial conglomerate 3M Co. (MMM) have risen 17% this year. Things might have looked rosy for the company given the pandemic seems to be under control. However, two lingering liabilities and conservative management might be keeping a lid on 3M’s growth prospects. (Tweet This)
Of PFAS And Earplugs
3M has been acknowledged as one of the most innovative companies on the planet. This manufacturer of everything from post-it notes to Scotch-Brite and industrial products had a long-standing policy of letting employees take 15% of their work time to tackle pet projects. In fact, Google borrowed this idea when instituting its 20% work on personal projects policy for its employees.
PFAS: Polyfluoroalkyl substances are used in everything from food packaging to construction material to household products. PFAS is known as the unbreakable molecule - it does not degrade over time. While its uses are plenty, it pervades the planet so completely today that it has made its presence felt everywhere including groundwater, soil, the human body, animals - name it.
With the Environmental Protection Agency raising a red flag, 3M phased out PFAS back in the early 2000s. Yet, the manufacturing sites continue to be contaminated. In Q1 2019, 3M took a $548M litigation charge including $235M for lawsuits related to PFAS followed by a $17M charge in Q1 2020. Cleanup costs and compensation for impacted families near these plants are as yet unknown.
Earplugs: 3M also makes the foam and related material that is used in earplugs. The earplugs are heavily used in the military in order to protect the personnel who are working with ordnance and operating in high-decibel environments.
In 2016, Moldex-Metric Inc., a company that makes respiratory and hearing protection products sued 3M and its subsidiary Aearo Technologies for selling defective material that went into products to be used by the military. 3M settled the allegations in 2018 by paying $9.1M and admitted to no wrongdoing.
Just as 3M executives were breathing easy (no pun intended), the company faced litigation from thousands of military men and women who suffered hearing damage after using those earplugs. As of August 2019, 3M and Aearo were defendants in over 2K lawsuits in a Florida Federal court. Last month, a US Army veteran was awarded $1.7M in damages for his hearing loss by a federal jury in Florida.
Q1 2021 saw the US economy grow at an annual rate of 6.4%. 3M for its part has reported a 10% growth in sales during the same period. However, the company abstained from increasing its guidance for the full year. Its management expects full-year sales growth to be between 5-8%.
Perhaps as a token acknowledgment of the PFAS fiasco, 3M plans to invest over $1B over the next 20 years to accelerate its new environmental goals. It aims to reduce water use by 25% at its facilities and return high-quality water to the environment after manufacturing operations.
Given the potential for liabilities due to lawsuits making their way through the courts, the unknown quantum of PFAS cleanup costs, and management’s unwillingness to be more bullish, 3M’s stock has been downgraded from buy to hold.
The management will do well to focus on business growth rather than legal hassles. However, the reverse seems to be true at this time. While the stock has returned double-digits to shareholders this year, future performance will depend on how the leadership will steer the company away from troubled waters and towards a promising future.
MMM ended at $199.86, up 1.51%.
Company Snapshot 📈
MMM $199.86 +2.97 (+1.51%)
Analyst Ratings (21 Analysts) BUY 24% HOLD 62% SELL 14%
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