Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More
Shares of industrial conglomerate 3M (MMM 2.19%) were up by 2.4% by 11 a.m. today. The move comes as the market digests the news that 3M will exit per- and polyfluoroalkyl substance (PFAS) manufacturing and aims to discontinue using PFAS in its products by 2025.
PFAS substances are believed to be toxic and harmful and have led to lawsuits and pressure on 3M from lawyers and environmental agencies. As such, the threat of substantive PFAS-related liabilities has hung over the stock.
The recent news won’t take away that threat, but it may help to de-risk the stock, given that 3M won’t be producing or using PFAS in the future.
Still, these actions won’t come without consequences. First, according to the press release, 3M’s manufactured PFAS sales are around $1.3 billion, with an earnings before interest, taxation, depreciation, and amortization (EBITDA) margin of 16%. So they amount to $210 million worth of EBITDA, representing around 2.2% of 3M’s estimated EBITDA of $9.1 billion in 2022.
Second, 3M expects these actions to result in $1.3 billion to $2.3 billion in pretax charges, with $0.7 billion to $1 billion incurred in the current quarter. Management estimates 70% to 80% of the charges will be noncash, meaning 20% to 30% of the total charges will be cash.
In other words, the cash charge could be as low as $260 million to something as high as $690 million over the next few years. The midpoint would shave a few percentage points off the $17 billion in free cash flow 3M is expected to generate in the next three years.
Moreover, 3M will have to find ways to use other substances in its products.
The costs of not selling or using PFAS are manageable and won’t make or break the case for buying the stock. Still, the PFAS liability still hangs over the stock, and there’s the deeper underlying problem that 3M hasn’t demonstrated an ability to grow revenue significantly or expand profit margins in recent years.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends 3m. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.
Making the world smarter, happier, and richer.
Market data powered by Xignite.
