Investment potential of 3M Health Division spin-off

Investors woke up this week to find shares of 3M New York Stock Exchange: MMM trading down about 20%. What appeared to be a recovery is now a scary environment for 3M shareholders. However, it’s not all bad news. The stock is trading lower due to the final spin-off of its healthcare unit, which is now trading as Solvent NYSE:SOLV.

Large-cap stocks like 3M often look to diversify their core businesses to spur growth. After all, it’s not easy for management teams to deliver stellar growth opportunities when running a $58 billion behemoth. Management believes that spinning off the healthcare division into 3M can free up needed capital to reinvest in higher growth areas.

As the U.S. economy heads for a new manufacturing turnaround, 3M’s core business is even stronger than ever. With healthcare in the rearview mirror, 3M management is now looking at areas of industrial and automation through artificial intelligence capabilities to deliver further value to shareholders.

The trend is strong for 3M’s new cash

Analysts at The Goldman Sachs Group Inc. NYSE:GS expressed their expectations for a recovery of the manufacturing sector in the US economy; Investors can find the full thesis within the bank’s 2024 macroeconomic outlook report.

As the Federal Reserve (the Fed) is looking to cut interest rates this year, fundamental trends could be set to further push the manufacturing sector breakout thesis. Traders think these cuts could come as early as May or June of this year, according to the FedWatch tool offered by the CME Group Inc. NASDAQ: ECM.

Since currency values ​​tend to be tied to interest rate curves, lower rates in the United States could cause the dollar index to decline.

A cheaper dollar relative to foreign currencies could make American exports more attractive, an effect seen in February’s ISM manufacturing PMI index, as export orders increased by a factor of 6.4%.

With new export orders driving the industry’s recovery, manufacturing must pick up the pace to meet these new orders, which will profit for stocks like 3M.

Over the past month, 3M shares have outperformed the Selected Industrial Sector NYSEARCA: XLI up to 20.2%.

This underperformance leaves a gap wide enough for Wall Street and Main Street to pick up, could be why analysts pause Barclays New York Stock Exchange: BCS they raised their price targets to $107 per share, which is 15.2% higher than today’s prices.

Keep growth in mind

Investors can follow 3M’s latest quarterly financial results, where they will find that the Industrial and Security segment took home the majority of the company’s operating income.

Of the $1.3 billion in operating profit, $523 (about 40%) came from security and manufacturing. By comparison, just $372 million came from health care, or 27%.

With new liquidity, the company may choose to enhance its stock buyback program by tackling cheap stocks. With only $33 million in buybacks for 2023, the majority of shareholder returns came from the stock’s 6.5% annualized dividend payments.

Whether through buybacks or acquisitions, management said this strategic spin-off will pave the way for the company’s future growth.

By identifying tailwinds and accelerating trends in automotive technology and the need for industrial automation, 3M may soon find a suitable company to help the manufacturing sector ramp up needed production.

With China’s economy carrying out its first manufacturing expansion in more than six months, 3M’s consumer and industrial segments could change sentiment for the stock, especially after months of scrutiny due to “forever chemicals” lawsuits “.

The legal settlements totaled about $13 billion to be paid over the next decade. 3M’s financials show that free cash flow (operating cash flow minus capital expenditures) has been between $4.5 billion and $6.5 billion over the past 5 years.

With just 2 to 3 years of free cash flow, the company can meet these financial needs and refocus on further growth acquisitions.

The market’s attention now turns to the question of whether 3M is still worth buying today, even after the spin-off. The answer is debatable, although Forbes is not far from Barclays. Factoring in its 20% stake in Solventum, with respective growth projections in other segments, valuations for 3M fall to around $105 per share, requiring an upside of around 13%.

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