Should 3M Be Considered a Leading Stock Investment for 2025?
After decades of disappointing results, 3M's (MMM -0.81%) shares managed to impress investors in 2024, recording a 17% rise. However, the question remains: what's in store for 3M in 2025? Moreover, how can investors keep tabs on 3M's progress?
CEO Bill Brown is under no illusion that 3M is a swift-fix situation. Nevertheless, his restructuring strategy hints at some critical actions and vital operational indicators to keep an eye on, which could potentially enhance the company's overall performance in the long haul.
3M in 2025
It's worth mentioning that 3M has a meeting scheduled for Feb. 26, during which Brown will delve deeper into 3M's plans and advice. Despite his upfront approach, he's acknowledged the steps needed to revitalize 3M. The solutions primarily revolve around two primary objectives as proposed by Brown:
- Enhancing organic revenue growth by reigniting innovation and boosting commercial effectiveness
- Enhancing operational efficiency
Organic revenue growth: Focus on NPI growth
These strategies will take time to materialize, with improving NPI development being a key element of the strategy, responsible for 3M's downturn over the last ten years. Despite the challenges ahead, 3M is implementing incremental steps to improve NPIs in the short term.
Brown has assigned a team of 100 researchers and developers to work on NPI development. Furthermore, the company is accelerating the development of low-risk product line extensions and reducing the time it takes to introduce a new SKU from 100 days in 2023 to 60 days in 2024. This endeavor is expected to result in an 10% increase in NPIs in 2024, with the growth expected to accelerate even further in 2025.
Historically, 3M has invested heavily in research and development to produce differentiated products that yield pricing power and boost market share. The surge in sales then fuels margin expansion as volumes increase, and 3M benefits from its global scale. Moreover, NPI products generally command higher pricing power. To summarize, NPI growth isn't just a revenue opportunity; it's also a margin opportunity.
Operational efficiency: Eyeing improved gross profit margins
Brown's restructuring blueprint includes generating productivity improvements by optimizing its supply chain, reducing complexity, improving supply quality, and minimizing costs. As a result, Brown anticipates a 2% increase in productivity, equating to approximately $260 million of the company's $13 billion in COGS.
Another method to boost profit margins (specifically, operating profit margins) is by enhancing efficiency. Encouragingly, Brown mentioned an issue of concern for investors over the previous decade.
Quite frankly, 3M's former leadership lacked credibility in meeting their projections. Consequently, for investors relying on management's projections, and for 3M, which depends on specific sales targets, understating actual sales can lead to operational inefficiencies. In a nutshell, Brown admitted that 3M's forecast accuracy isn't up to par, resulting in an ineffective utilization of major operating equipment. Currently, these devices operate at a meager 50% capacity.
To rectify this, Brown announced the creation of a project to revamp 3M's forecasting process. The new demand plan aims to improve the accuracy of its sales predictions for two major divisions, with different analytical tools. The results should be available before 3M's investor day, and progress will likely be discussed in the fourth-quarter earnings report. Improving operational efficiency, in turn, will enhance operating costs, cash flow, and 3M's relationships with suppliers and distributors.
A worthy investment for 2025?
The potential for self-improvement at 3M in 2025 is substantial, although it may take some time to fully reap the benefits of NPI investment. Similarly, optimizing the supply chain and enhancing operational equipment efficiency won't occur overnight. Still, if Brown manages to demonstrate that 3M is heading in the right direction, it could potentially mark the start of significant value creation, even in an environment offering low single-digit organic sales growth.
In conclusion, 3M serves as an appealing choice for value investors, given its self-help narrative and Brown's commitment to creating value for shareholders.
Investors looking to keep tabs on 3M's progress in 2025 might want to pay close attention to the company's scheduled meeting on Feb. 26, during which CEO Bill Brown will discuss 3M's plans and provide updates. As part of Brown's restructuring strategy, investing in research and development to improve NPIs is a key focus, with a goal to increase NPIs by 10% in 2024 and even further in 2025.
To enhance operational efficiency, Brown is focusing on reducing costs, improving operational equipment efficiency, and optimizing the supply chain. With the potential for self-improvement and value creation, 3M could be an attractive investment option for value investors in 2025, as Brown works to increase 3M's overall performance in the long term. With the right actions and operational indicators, 3M may be positioned for a more promising financial future.
[Primary keyphrase: 3M, Bill Brown, restructuring strategy, NPI growth, operational efficiency, value creation, value investors]
