Consumer/industrial conglomerate 3M (NYSE: MMM), has a storied history. The 123-year-old company invented Scotch Tape, Post-it notes and a groundbreaking waterproof sand paper.
But in recent years, it has hit the skids amid lawsuits over the safety of some products, a lack of innovation and weak earnings. As a result, the stock has scored an annualized total return of just 3.7% over the past five years, less than one-fourth the 16.6% return for the S&P 500.
But 3M now appears to be on the rebound, as it has settled some of the lawsuits, made strides on the innovation front and boosted its earnings. It also spun off its healthcare subsidiary Solventum. William Brown, who took over as CEO last year, has received high marks from analysts.
So 3M stock has performed better recently. It has returned 21.1% year to date, easily beating the S&P 500’s return of 14.4%.
As for the history, 3M has faced lawsuits for its production of PFAS, or forever chemicals, since 2010. PFAS is short for perfluoroalkyl substances. The chemicals are used in products such as firefighting foam, non-stick coatings, and water-repellent materials.
PFAS lawsuits
States, municipalities, and individuals have sued 3M, arguing that PFAS contamination of water supplies and soil has caused cancer, developmental defects, and immune system problems.
3M began making PFAS in the 1950s, began phasing them out in the early 2000s, and has pledged to stop making them by year-end. It has paid out about $12.6 billion to settle lawsuits, and still faces many more.
“Estimating 3M’s legal liabilities from producing PFAS, is a highly uncertain exercise,” writes Morningstar analyst Nicholas Lieb. “While some believe these liabilities total greater than the firm’s market capitalization, we think 3M’s settlements and the spinoff of Solventum reduce 3M’s risks substantially.”
He is concerned about the risk for 3M of the PFAS suits. “But they’re manageable in their current state. 3M continues to work through PFAS-related claims in individual U.S. states, with a handful resolved,” Lieb said.
The company also faces lawsuits over its Combat Arms Earplugs sold to the U.S. military from 2003 to 2015. Over 300,000 service members and veterans filed claims alleging the earplugs were defective, leading to hearing loss and tinnitus due to improper sealing.
Big outlays for penalties
3M paid over $18.7 billion in penalties from 2021 to 2024, more than any other major U.S. company, due largely to PFAS and earplug settlements. Its litigation costs totaled $790 million in the second quarter, up from $440 million a year earlier. But 3M may survive the actions in one piece.
On the innovation front, legal penalties took resources from research and development. But now CEO Brown is trying to return the company to its roots, with a goal of generating 30% of revenue from products less than five years old. It plans to invest $3.5 billion in R&D in 2025-2027. The company’s newest products include advancements in adhesives, abrasives, and filtration systems.
All these efforts, along with cost cuts that included 8,500 layoffs in 2023, have helped earnings rebound. 3M’s revenue climbed 1.4% in the second quarter from a year earlier, to $6.3 billion. While earnings per share fell to $1.34 from $2.07, adjusted EPS gained to $2.16 from $1.93. And the company lifted its adjusted EPS estimate for the year as a whole.
“3M’s fourth-quarter results and guidance are a win for investors,” said CFRA analyst Jonathan Sakraida, according to Reuters.
Its financial and stock performance may continue to improve, as long as it doesn’t get drowned in litigation.
The author owns shares of 3M.
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