3M: A Century of Innovation and Industrial Leadership

3M is a diversified global manufacturer known for its deep innovation engine, strong portfolio of industrial and consumer products, and decades-long track record of shareholder returns. From iconic brands like Post-it and Scotch to advanced materials used in electronics, transportation, and healthcare, 3M operates across multiple sectors with scale and technical expertise. Following the spin-off of its healthcare business and renewed focus on operational excellence, the company is aiming to streamline, innovate, and rebuild momentum. The question remains: Does this industrial giant still have what it takes to reward long-term investors?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in 3M at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of 3M, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

3M Company is a global manufacturing business that produces a wide variety of products used in everyday life, industry, and technology. After separating its healthcare division in 2024 into a new company called Solventum, 3M now focuses on three main areas: Safety and Industrial, Transportation and Electronics, and Consumer products. The Safety and Industrial segment includes items like protective gear for workers, industrial tapes, adhesives, and abrasives used in factories and construction sites. This is 3M’s largest business and supports key industries such as manufacturing, energy, and infrastructure. The Transportation and Electronics segment provides materials and solutions used in vehicles, airplanes, and electronic devices. Products in this segment include films for screens, sound insulation, and components for semiconductor manufacturing. It serves fast-changing markets such as electric vehicles, data centers, and electronics production. The Consumer segment covers products that many people use at home or in the office. This includes well-known brands like Scotch tape, Post-it notes, Command hooks, and Filtrete air filters. These products are widely available in stores and are often bought for cleaning, organizing, or home improvement. The company’s competitive advantages are grounded in its longstanding commitment to innovation, with a deep R&D capability that spans decades. 3M maintains a vast portfolio of patents and proprietary technologies, which it leverages across multiple product categories to drive growth and differentiation. This ability to cross-deploy technologies enhances efficiency and supports continuous innovation. Its portfolio of trusted consumer and industrial brands also reinforces customer loyalty and pricing power. With operations in over 200 countries, 3M benefits from a global distribution network that would be difficult for competitors to replicate. It holds leadership positions in many niche markets such as industrial adhesives, reflective materials, and personal protective equipment, which are often technically demanding and less susceptible to commoditization. In recent years, the company has emphasized operational excellence and performance improvement through its 3M eXcellence system, aiming to enhance execution and profitability. These factors - innovation, branding, scale, distribution, and market leadership - collectively provide 3M with a durable competitive moat, enabling it to maintain leadership across a broad array of industries

Management

William “Bill” Brown serves as the CEO of 3M Company, a position he assumed in May 2024. He brings over three decades of leadership experience in industrial technology and defense, known for driving operational excellence, leading complex transformations, and executing strategic realignments. Prior to joining 3M, Bill Brown was Chairman and CEO of L3Harris Technologies, where he oversaw the successful merger of L3 Technologies and Harris Corporation in 2019, creating one of the largest defense technology companies in the United States. Under his leadership, L3Harris delivered consistent growth, expanded margins, and strengthened its innovation pipeline through disciplined R&D investment. Earlier in his career, Bill Brown held leadership positions at United Technologies Corporation (UTC), where he served as President of UTC’s Fire & Security business and led several global units in high-tech engineering and manufacturing. His experience spans a range of sectors including aerospace, defense, electronics, and safety, industries that closely align with 3M’s core segments. Bill Brown holds an MBA from the Wharton School and a Master’s degree in Mechanical Engineering from Villanova University. He is known for being a hands-on, results-oriented leader who focuses on accountability and building a strong company culture. At 3M, he has introduced a new system called “3M eXcellence” to improve how the company operates and to make sure teams are focused on delivering strong performance. He is also leading 3M through an important period of change, following the spin-off of its healthcare business, while working to resolve long-standing legal issues the company has faced. Given his background in leading large, diversified businesses and his focus on both innovation and operational discipline, Bill Brown is well-positioned to guide 3M through its next chapter.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Historically, 3M has delivered strong ROIC above 10% in nine out of the past ten years. This strong performance reflects several long-standing strengths. First, 3M invests heavily in research and development, allowing it to create high-value, proprietary products that competitors often struggle to match. This innovation supports pricing power and helps the company stay relevant across evolving markets. Second, 3M holds a large number of patents and consistently reuses its core technologies across multiple product lines. This makes product development more efficient and reduces the need for constant reinvestment. In addition, 3M’s global scale and well-established distribution network allow it to serve customers in over 200 countries while keeping costs under control. This operational efficiency helps the company convert more of its revenue into profit. Finally, 3M is often the leader in niche markets such as industrial adhesives, abrasives, and safety equipment, segments that face less price pressure and support higher profitability. ROIC fell sharply in 2022 due to a mix of legal charges, inflation, and weaker market conditions. Large costs tied to lawsuits over PFAS chemicals and military earplugs significantly reduced earnings. At the same time, rising input costs and supply chain disruptions put pressure on margins, while demand slowed in key areas like electronics and consumer goods. Restructuring costs linked to the healthcare spin-off added further strain. While ROIC has improved since then as legal risks have been addressed and operations have stabilized, it has yet to return to previous highs, but it appears to be heading in the right direction.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. The sharp drop in 2023 was mainly due to large legal costs from settling lawsuits related to PFAS chemicals and military earplugs. These charges led to a sizable net loss, which reduced retained earnings, which is an important part of total equity. Equity dropped further in 2024, mainly because 3M completed the spin-off of its healthcare business, Solventum. This meant removing related assets and liabilities from the balance sheet, which reduced equity. On top of that, changes in the value of the 19,9% stake 3M kept in Solventum also lowered equity. These were mostly non-cash and technical accounting effects, not a result of poor business performance.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. In 2024, free cash flow was noticeably lower than in previous years, and there are a few clear reasons for that. First, the company made large cash payments related to legal settlements, including lawsuits over PFAS chemicals and military earplugs. These payouts had a big impact on how much cash was left over after covering business needs. Second, the spin-off of 3M’s healthcare business, Solventum, removed a major cash-generating part of the company. With that division no longer included, 3M’s remaining business naturally produced less free cash flow. Finally, 3M also faced extra costs from reorganizing parts of the business, including things like closing facilities and other one-time expenses. On top of that, the timing of cash going in and out was less favorable than usual - for example, some customers took longer to pay, and the company had to spend more upfront on certain projects. These factors temporarily reduced the amount of cash available during the year. Excluding 2024, 3M has historically delivered relatively high free cash flow margins. This strong performance comes down to several structural strengths in the company’s business model. 3M has focused on high-margin niche markets, like industrial adhesives and safety gear, where it benefits from pricing power and strong customer relationships. Its innovation model allows it to reuse technologies across products, keeping R&D efficient and reducing the need for large new investments. In addition, 3M’s global scale and relatively asset-light operations help keep costs low, allowing more of its earnings to be converted into free cash flow. 2024 was an unusual year for 3M’s cash flow, mainly due to legal settlement payments and one-time costs from the healthcare spin-off. These were temporary disruptions and are not expected to continue. With the spin-off complete and restructuring efforts winding down, 3M is in a better position to focus on its core business and strengthen cash flow going forward. As free cash flow improves, shareholders can reasonably expect higher dividends. The company has paid dividends without interruption for more than 100 years and also uses free cash flow to buy back shares. The free cash flow yield in 2024 is an outlier and does not reflect the company’s true valuation. We will revisit valuation later in the analysis.

Debt

Another important area to investigate is debt, and we want to see whether a business has a reasonable level of debt that could be paid off within three years. To assess this, we divide total long-term debt by earnings. When applying this measure to 3M, the result shows that it would take 2,8 years of earnings to pay off its long-term debt. This is below the three-year threshold, which means debt isn’t a concern for me if I were to invest in 3M. It’s also worth noting that long-term debt is now at its lowest level since 2016. And as 3M expects to grow its earnings, the debt-to-earnings ratio will likely decline further in the coming years.

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Risks

Macroeconomics is a risk for 3M. As a global industrial company, 3M’s business is highly sensitive to broader economic conditions, including industrial production, GDP growth, inflation, foreign exchange, and trade policy. When industrial production slows, so does demand for many of 3M’s products. Some of the more specific macro risks show up in key end markets. Auto builds are expected to decline by 3 to 4 percent in the United States and Europe, where 3M has stronger market penetration, and stay flat in China. While growth is expected in other parts of Asia, 3M’s content per vehicle tends to be lower in those regions. In consumer electronics, growth is expected to be in the low to mid-single digits. Meanwhile, consumer discretionary spending remains soft, especially in the United States, where retail sales are expected to be relatively flat. These trends can affect 3M’s Consumer and Transportation and Electronics segments, both of which depend on healthy end-market demand. Inflation continues to be another important factor. 3M has faced rising costs for raw materials, labor, and logistics. While it has been able to raise prices to protect margins, there is a limit to how much can be passed on to customers, especially if overall demand is weak. If inflation remains high, it could continue to put pressure on profitability. Geopolitical tensions and changes in government policy add another layer of uncertainty. Trade restrictions, tariffs, and regional instability such as the war in Ukraine or tensions between the United States and China can disrupt supply chains, limit access to key markets, and raise compliance costs. Export controls, in particular, could hurt demand for 3M’s products in sensitive areas like electronics materials. Taken together, these factors show that 3M’s performance is closely tied to the strength of the global economy.

Litigations are a major risk for 3M, primarily due to its historical involvement in PFAS manufacturing and issues related to military earplugs. These cases have already resulted in multi-billion dollar settlements and could lead to further financial and operational challenges. 3M has been a long-time producer of PFAS, a group of durable synthetic chemicals often referred to as “forever chemicals” because they do not easily break down in the environment. Although the company voluntarily phased out certain types of PFAS as early as 2000 and has committed to fully exit PFAS manufacturing by the end of 2025, it remains exposed to significant legal and regulatory risk. In 2023, 3M agreed to a large settlement with U.S. public water systems to fund PFAS cleanup, totaling over $10 billion. While this settlement resolved a major portion of PFAS-related claims, additional lawsuits could still arise—from state governments, private entities, or individuals. Complicating matters further, 3M retained PFAS-related liabilities tied to its former healthcare division even after spinning it off into Solventum, meaning it is still responsible for past exposure tied to certain healthcare-related products. Separately, the company has also faced extensive litigation over its Combat Arms Earplugs, which were sold to the U.S. military and allegedly caused hearing damage to veterans. In 2023, 3M agreed to a $6 billion settlement to resolve nearly 250,000 lawsuits. While this deal has reached over 98 percent claimant participation, some risk remains if claimants opt out or if unexpected legal issues arise, potentially increasing costs or prolonging uncertainty. In both cases - PFAS and earplugs - the total financial impact stretches over several years, absorbing cash that could otherwise be used for investment, debt reduction, or shareholder returns. The long-term legal tail, ongoing regulatory developments, and the possibility of future lawsuits all create meaningful uncertainty.

Competition is a risk for 3M because the company operates across a wide range of industries where it faces constant pressure from both global peers and lower-cost rivals. In industrial products, companies like Honeywell, Emerson, and Danaher compete aggressively on both innovation and price. In consumer goods, 3M’s well-known brands like Post-it and Scotch go up against not only other major brands but also private-label alternatives, especially in price-sensitive markets and regions like China. 3M’s wide product portfolio is a strength, but it also means the company must manage competition in many different categories at once. In each area, it needs to continuously invest in R&D, protect pricing power, and defend market share. A delay in launching a new product, or an inability to match the pace of innovation, could allow competitors to take share. For example, if a large industrial customer switches to a competing supplier - due to better pricing, faster delivery, or preferences for PFAS-free materials - 3M could lose a high-margin revenue stream. Shifts in customer behavior and market trends also pose risks. As preferences change - such as rising demand for more sustainable or PFAS-free products - 3M must adapt quickly or risk losing relevance. In consumer-facing categories, especially outside the U.S., the company has acknowledged increased competition from private-label and China-based manufacturers. In some cases, 3M has chosen to walk away from lower-margin business rather than compete purely on price, but this comes at the cost of lost volume. Competitive pressure also limits how much 3M can raise prices to offset inflation, depending on how differentiated its products are in a given category. Overall, while 3M's scale and innovation capabilities give it an advantage, the company must constantly navigate a competitive landscape that is evolving quickly. Failure to respond to shifts in technology, pricing dynamics, or customer expectations could impact sales, margins, and long-term market position.

Reasons to invest

Innovation is a reason to invest in 3M. After several years of underperformance in this area, the company is now reigniting its innovation engine with greater urgency and focus. In 2024, 3M launched 169 new products, a 32% increase from the previous year, and it expects to launch more than 1.000 new products over the next three years. The company is also improving execution, with on-time launch rates rising from 56% to over 70%. This momentum signals that 3M is turning a corner in its ability to bring new ideas to market. Some of the recent launches reflect 3M’s core strengths in materials science and optics. For example, its LCD 2.0 platform combines optical film and microreplication technologies to give standard displays OLED-like performance. Another example is the Expanded Beam Optics connector for data centers, which improves performance while reducing installation time and maintenance. These types of innovations are targeted at growing markets such as personal electronics, cloud infrastructure, and advanced manufacturing. Importantly, 3M is working not just to increase the number of launches, but to shift toward more impactful innovations. Many of the recent products are considered incremental, with modest near-term sales, but the company aims to release more high-potential products - so-called "Class IV" launches—that can meaningfully drive revenue and margin expansion over time. This shift reflects a more strategic focus on areas like automotive electrification, industrial automation, home improvement, and personal safety - markets aligned with long-term global trends. To support this effort, 3M has added R&D talent, reallocated resources, and invested in lab and prototyping equipment to shorten development cycles. The company is also strengthening its connections with customers and innovation partners to ensure that its R&D efforts are aligned with real-world needs and market opportunities.

Improving service is a reason to invest in 3M because service reliability is directly tied to sales performance, customer loyalty, and market share. Over the past couple of years, 3M has struggled to consistently meet customer expectation leading to lost business even when it had a better product, stronger brand, or competitive price. Customers who need products quickly will not wait, and when 3M cannot deliver on time, they turn to competitors. To address this, the company is making meaningful improvements to its service capabilities, with a particular focus on the supply chain. A key measure of this is OTIF - on-time, in-full delivery - which rose to 88% in 2024, up from 85% in 2023 and 80% in 2022. While that’s progress, it's still below what customers expect, especially in industries that rely on just-in-time delivery. In consumer products, 3M is now running at over 93% OTIF, and in transportation and electronics, above 90%. But in the critical Safety and Industrial segment, performance remains in the low 80s, and the company acknowledges that this is costing them sales. To fix this, 3M is implementing a more standardized and data-driven approach to supply chain planning. This includes improved demand forecasting using new algorithms, better collaboration with suppliers, and greater consistency in logistics execution. These steps are part of a larger operational excellence program, aimed at strengthening the company’s ability to deliver efficiently and reliably across all business lines. The importance of this effort cannot be overstated. Better service helps 3M keep its existing customers satisfied and makes it easier to attract new ones, especially large retailers and industrial clients who expect reliable and timely deliveries. It also helps the company avoid making too much or too little product, which reduces waste, frees up cash, and supports stronger profits.

Portfolio optimization is a reason to invest in 3M. The most significant move in this direction was the 2024 spin-off of Solventum, 3M’s healthcare business. This separation allows 3M to focus entirely on its core strengths - industrial, safety, electronics, and consumer products - while Solventum pursues its own growth path in healthcare. Each company can now allocate capital more effectively, tailored to the dynamics of its respective market. For 3M, this marks a shift toward a more disciplined and focused capital allocation strategy. By shedding non-core or lower-margin businesses, the company can redirect resources into areas with stronger long-term potential, such as innovation, operational upgrades, and higher-return opportunities in fast-growing markets like industrial automation and automotive electrification. Simplifying the business also helps improve execution. A leaner portfolio means fewer distractions for management, better alignment between strategy and operations, and clearer internal priorities. In addition, portfolio optimization supports margin improvement. By exiting structurally challenged or slower-growth segments, 3M is gradually shifting its business mix toward categories with stronger pricing power, higher demand visibility, and more defensible competitive positions. This transition should help improve profitability over time, especially as the company invests more in innovation and supply chain performance. Management has indicated that additional small divestitures are underway, although progress may be slower due to factors like trade policy uncertainty. Still, the direction is clear. These steps reflect a broader strategy to streamline the company, sharpen its competitive focus, and drive better financial results. For investors, this ongoing transformation adds to the case for long-term value creation.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 7,26, which is from the year 2024. I have selected a projected future EPS growth rate of 6%. The company targets long-term EPS growth of between 4% and 8% annually. Additionally, I have selected a projected future P/E ratio of 12, which is double the growth rate. This decision is based on 3M's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $38,57. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy 3M at a price of $19,28 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.918, and capital expenditures were 1.181. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 827 in our calculations. The tax provision was 804. We have 544,6 outstanding shares. Hence, the calculation will be as follows: (1.918 – 827 + 804) / 544,6 x 10 = $34,80 in Ten Cap price. However, it should be noted that the legal settlements significantly affected operating cash flow in 2024. If it weren’t for these settlements, operating cash flow would have been approximately $5,600, and the Ten Cap price would have been $102,40.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With 3M's free cash flow per share at $1,17 and a growth rate of 6%, if you want to recoup your investment in 8 years, the Payback Time price is $12,27. However, free cash flow in 2024 was affected by the legal settlements. If it weren’t for these settlements, free cash flow per share would have been $8,88, and the Payback Time price would have been $93.16.

Conclusion

I believe that 3M is an intriguing company, and I really like the new management. The company has built a moat through its innovation, branding, scale, distribution, and market leadership. While the past three years have been challenging, 3M has historically achieved a high return on invested capital each year, and the trend suggests it is on track to return to those strong levels. Excluding 2024, the company has also consistently delivered a high levered free cash flow margin for its sector, which speaks to the quality of the business. Macroeconomics is a risk for 3M because its performance is closely tied to global industrial activity, consumer demand, and trade conditions. Slower growth in key markets, inflation, and geopolitical tensions can reduce demand, raise costs, and disrupt supply chains, pressuring both sales and profitability across multiple segments. Litigation is another risk due to 3M’s involvement in PFAS and military earplug lawsuits, which have already resulted in multi-billion dollar settlements. While the company has made progress in resolving major cases, ongoing legal exposure, regulatory uncertainty, and the possibility of new claims continue to pose financial and operational challenges. Competition is also a risk, as 3M operates in many markets where global peers and low-cost rivals compete aggressively on price, innovation, and customer preference. With a broad product portfolio, 3M must constantly defend its market share. Any delay in innovation or failure to adapt to shifting trends, such as demand for PFAS-free alternatives, could lead to lost sales and margin pressure. Innovation is a reason to invest in 3M. The company is reigniting its product development engine with more focus and higher output, aiming to launch over 1.000 new products in the next three years. By concentrating on more impactful technologies in fast-growing areas like cloud infrastructure and industrial automation - and by improving execution through better R&D and closer customer alignment - 3M is positioning itself to drive long-term growth and margin improvement. Improving service is another reason to invest. Better delivery performance strengthens customer relationships, prevents lost sales, and supports margin expansion. 3M is making progress in supply chain reliability, which not only increases customer satisfaction but also improves efficiency and cash flow through more accurate planning and logistics. Portfolio optimization also supports the investment case. The spin-off of its healthcare business and other ongoing divestitures allow 3M to streamline operations, focus on core segments with stronger long-term potential, and allocate capital more effectively. This shift is helping the company improve execution and gradually move toward a more profitable and strategically focused business mix. While there are many things to like about 3M, I believe there are better opportunities in the market right now. Therefore, I will not be investing in 3M at this time.

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