3M Posts a Beat After PFAS Adjustments But Is it Time to Invest?

On Tuesday morning, 3M (MMM)  released the firm's fourth quarter financial results. For the three-month period ended December 31, 3M posted an adjusted EPS of $1.83 (GAAP EPS: $1.07) on revenue of $6.133 billion. These top- and bottom-line results were both good for very slight beats while the sales print amounted to year-over-year growth of 2.1%. The firm made sizable adjustments for litigation-related expenses, manufactured PFAS products and transformation costs.

Operations 

As revenue generation increased 2.1% to $6.133 billion, cost of sales increased 8.8% to $4.075 billion and total operating expenses grew 8.4% to $5.337 billion. That left a GAAP operating income of $796 million (-26.6%) as GAAP operating margin dropped all the way from 18.1% to 13%. Once adjusted for all of the above, operating income printed at $1.269 billion and operating margin improved from 19.7% to 21.1%. Just like magic. 

After accounting for interest, other income and expenses as well as taxes, GAAP net income attributable to 3M shareholders hit the tape at $577 million (-20.7%). This worked out to $1.07 per fully diluted share, down from $1.33 for the year-ago period. After adjustments, net income becomes $987 million or $1.83 per fully diluted share, up from $1.68 a year ago.

Segment Performance

• Safety & Industrial generated sales growth of 6% to $2.865 billion, generating an operating income of $665 million (+16.3%)
• Transportation & Electronics generated sales "growth" of -1.7% to $1.961 billion, generating an operating income of $140 million (-39.9%)
• Consumer generated sales "growth" of -1.2% to $1.214 billion, generating an operating income of $218 million (-6.8%)

Guidance 

For the full fiscal year 2026, the firm is projecting adjusted sales growth of roughly 4% to include organic sales growth of roughly 3%. 

The firm also sees adjusted operating margin expansion of 70 to 80 basis points and an adjusted EPS for the year of $8.50 to $8.60. At the midpoint, this guidance fell one penny per share short of consensus view. MMM also projects adjusted operating cash flow of $5.6 billion to $5.8 billion, contributing to adjusted free cash flow conversion rate equal to or greater than 100%.

Fundamentals 

For the quarter, 3M generated operating cash flow of $1.534 billion. Out of that number came $248 million in traditional capex spending and out came $5 million in impacts from manufactured PFAS products. This left free cash flow of $1.291 billion. For the year, MMM generated $4.374 billion in free cash flow, but returned $4.813 billion to shareholders in the form of stock repurchases and dividend payments. 

Turning to the balance sheet, 3M ended the quarter/year with a cash position of $5.933 billion and inventories of $3.661 billion. Current assets ran at $16.387 billion including $2.823 billion labeled as "other" which I thought was more than vague. Current liabilities printed at $9.595 billion including $1.67 billion in short-term debt. That left the firm with current and quick ratios of 1.71 and 1.33, which both pass muster. 

Total assets amount to $37.733 billion, of which less than 20% is labeled either goodwill or intangible. I do not have a problem with that for a firm this size. Total liabilities less equity comes to $32.986 billion. This does include long-term debt of $10.932 billion. While I do not love that, it is not the end of the world and at least it's not current in nature.

Thoughts 

The guidance is a little weak. The adjustments are huge. There are certain things that I do not like about this report. That said, it's not awful and it is better that we have become used to this firm. 3M may actually be on the right track fundamentally.

Technically, MMM has some problems. Readers will see the rising-wedge pattern from this past autumn that worked like a charm. That produced a sell-off that developed into a cup pattern ​that, with a less robust negative reaction on Tuesday morning, would have produced a bullish handle.

Instead, the stock is testing its 200-day SMA, which at $154.43 stands at a greater depth than did the bottom of the cup. The pattern is broken. Relative strength is plummeting as we speak and the daily MACD just suffered a double whammy. The histogram of the nine-day EMA crossed into negative territory as the 12-day EMA crossed below the 26-day EMA. These are short- and medium-term bearish signals.

Buy MMM on the dip? In my opinion, not unless the stock makes a real attempt at retaking its 200-day line in short order. That's even acknowledging the unfilled gap that was created on Tuesday morning. Should the stock fail to retake that red line, I think a trader could short the stock and protect themselves by grabbing an upside call against the position.

At the time of publication, Guilfoyle had no positions in any securities mentioned.