Shares in industrial giant 3M(NYSE: MMM) rose by a startling 24.8% in July, according to data from S&P Global Market Intelligence. This is a remarkable move, because it nearly all occurred on the day of the company's second-quarter earnings release.
Why 3M stock soared in July
The second-quarter results were better than expected, and management upgraded its full-year margin growth guidance, leading to an increase in the low end of its full-year earnings-per-share guidance from $6.80-$7.30 to a new range of $7.00-$7.30.
Still, the real cause of the move likely lies in a well-received presentation from its new CEO, William Brown, on the earnings call.
3M starts to solve its problems
What Brown said needs to be put into context. 3M has suffered significant legal uncertainty in recent years, with lawsuits over its production and use of PFAS chemicals and allegedly faulty combat arms earplugs. Those issues overhung the stock, but 3M has made settlements, and now investors have much greater clarity.
The settlements will require $18.5 billion to be paid by 2026, with $15.2 billion due by 2028, but 3M will generate around $4 billion in free cash flow (FCF) this year and has more than $10 billion in cash on its balance sheet. A recent dividend cut will help free up cash for settlement and debt payments.
While the clarity of legal issues is good news, 3M's management hadn't comprehensively called out the other elephant slumbering around the room. Until now, that is.
Brown addresses 3M's growth and operational problems
After years of lackluster growth and mediocre margin performance, it's become clear that 3M's products lack the differentiation and pricing power to drive volume growth and, in turn, margin growth. That's a significant issue for 3M, a company whose business revolves around research and development to produce differentiated products. The excellent news is that Brown acknowledged these concerns and stated a precise aim of improving to make new product introductions.
Image source: Getty Images.
While that will take time to transpire, his immediate focus is on improving operational performance, including reducing supply chain complexity, better leveraging its buying power with suppliers, rationalizing 3M's manufacturing footprint, and significantly reducing the amount of inventory 3M needs to hold to generate the same amount of sales.
In addition, he will take a concerted look at exiting non-core elements of 3M's portfolio. Investors have been waiting for this kind of root-and-branch restructuring for a long time, and hopefully, Brown will deliver.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
