A lot is happening at 3M, one of the leading materials companies in the world. With legal liabilities and a declining stock, the company is facing uncertainties that have left investors unsure of what to expect.
New Leadership in Healthcare Business
On Tuesday, 3M (ticker: MMM) announced the appointment of Bryan Hanson as the leader of its healthcare business. This division is set to become a separate company by the end of 2023. Bryan Hanson joins 3M from Zimmer Biomet (ZBH), where he previously served as CEO. Prior to his tenure at Zimmer Biomet, Hanson had an extensive career at Medtronic (MDT), one of the leading companies in the medical technology industry.
A Defensive Play
Gordon Haskett analyst Don Bilson highlights that Hanson has mainly been occupied with defensive strategies in recent years. As a result, the stock performance of Zimmer Biomet hasn’t seen significant growth. Despite starting 2018 at approximately $112 per share, the price currently stands at $116.68 as of early trading on Tuesday.
Given the relatively healthy state of the medical business that will be spun out, Hanson, now 56 years old, will likely have the opportunity to play on the offense in St. Paul.
CFO Takes on an Expanded Role
As part of the management shake-up, Monish Patolawala, current CFO of 3M, has been given the additional role of president. Patolawala joined 3M in 2020 after leaving General Electric (GE). It is speculated by analyst Don Bilson that Patolawala is being groomed to become the next CEO, succeeding Mike Roman, who has held the position since 2018.
Legal Liabilities and Stock Performance
Over the past years, 3M has been grappling with legal liabilities related to two major issues. One concern involves PFAS chemicals that have contaminated drinking-water supplies. The other issue revolves around potentially defective earplugs sold to the government. These challenges have impacted the company’s stock performance, which has seen a decrease of 50% in the past five years.
As of early Tuesday morning, 3M’s stock was trading at $99 per share, a significant decline from its previous rate of over $200 per share. In comparison, the S&P 500 experienced a slight increase of 0.1%, while the Dow Jones Industrial Average recorded a 0.1% decrease.
Amidst these challenges, 3M is embarking on a new chapter with strategic leadership changes in its healthcare division and the expanded role of the CFO. Only time will tell if these moves can help strengthen the company and restore investor confidence.
3M Faces Challenges Amid Legal Woes
In June, 3M made headlines with a $12.5 billion settlement for PFAS remediation with U.S. water providers. While the company’s stock initially rallied, it has since dipped below $100 per share. Investors remain cautious about the ongoing costs associated with settling liabilities, including personal injury lawsuits related to PFAS and the earplug issue.
To put the magnitude of the problem in perspective, 3M’s market capitalization was over $100 billion in 2018 but now stands at around $55 billion. This significant decline reflects the market’s concerns over the company’s legal troubles.
If Bilson’s predictions hold true and Patolawala assumes leadership in the coming years, he will face the challenge of resolving 3M’s legal issues without the support of the healthcare division.
During the second quarter, 3M’s healthcare unit recorded $2.1 billion in sales, contributing to a total revenue of $8 billion. Operating income from the division reached approximately $400 million out of a total of $1.5 billion.
When comparing valuations, GE HealthCare Technologies (GEHC) trades at around 17 times its operating earnings, while 3M trades at about 11 times its earnings. This valuation gap is one reason why 3M intends to spin off its healthcare business. The company hopes that by separating the businesses, the individual valuations will surpass the current combined valuation. As part of the deal, 3M will retain approximately 20% of the stock in 3M Healthcare.
After the spinoff, 3M will focus on its consumer product division, along with its operations in the transportation, electronics, and construction markets.
