Industrial materials giant
is exiting a business that’s given it a headache for years. The company is taking a billion dollar charge to shut things down. That money is just the tip of the iceberg.
(ticker: MMM) announced Tuesday it would stop manufacturing PFAS chemicals by 2025.
PFAS is short for per- and polyfluoroalkyl substance, traces of which have been found in some water supplies. The Environmental Protection Agency has proposed designating PFAS and related compounds hazardous substances which, essentially, would require companies such as 3M to remove substances from the environment.
3M, along with other chemical companies, have been sued by consumers believing they have been harmed by PFAS pollution.
3M expects to take charges totaling $1.3 billion to $2.3 billion to exit the business. A $700 million to $1 billion charge will be recorded in the fourth quarter of 2022. The company said about 70% to 80% of the charges are non-cash. 3M could spend up to a half a billion exiting the business.
Charges are never a good thing for investors but shares were trading down just 0.6% to about $121.50. The
fell 0.2% and the
Dow Jones Industrial Average
3M stock has fallen about 32% this year.
The reaction to the large charge is small, but legal liabilities from PFAS, as well as potentially faulty Combat Arms earplugs sold to the military, have clouded the investment case for 3M for some time, according to RBC analyst Deane Dray.
What’s more, the market expects the ultimate cost for both issues to be much higher than $1.3 billion or $2.3 billion.
3M stock was already down more than 50% from its all-time high set in early 2019. The S&P 500 has risen roughly 35% over the same span.
If 3M performed in line with the market over that span, shares would be roughly $300. The gap of roughly $180 per share compared with recent levels works out to about $100 billion in market capitalization.
That’s one way to estimate what the market has taken off the value of 3M to account for all the liabilities.
There are other ways to estimate. 3M stock is trading at about 12 times estimated 2023 earnings. That’s a discount to the market multiple of about 17 times estimated earnings. In the past, 3M stock typically traded at a premium to the market.
If 3M shares traded at a similar premium today, they would be roughly $210 a share. That $90 gap works out to about $50 billion in market capitalization.
It’s fair to say that the market is discounting a cost for legal liabilities in the $50 billion to $100 billion range for the company.
Only time will tell if that’s a good range.
Dray rates 3M stock at Sell and has a $113 price target on the shares. Only one analyst has a Buy-rating on 3M stock. That’s about 5% of all ratings. The average Buy-rating ratio for stocks in the S&P 500 is about 58%.
The average analyst price target is at about $127 a share.