3M's Strategic Spinoff: Solventum's Impact and Future Prospects

3M Company (NYSE:MMM) declared its intentions to spin off its healthcare segment a while back which was eventually undertaken in April. The new company called Solventum (NYSE:SOLV) and 3M shareholders received one share as a tax-free distribution of SOLV for every 4 shares of MMM.

Impact of Solventum Spinoff on 3M's EPS Projections

MMM’s healthcare segment made up about a quarter of overall sales before the spinoff. Thus, it may be possible to explain that shortly after the spinoff, the accounting EPS of MMM will be lower in the short term. The market anticipates that its EPS will significantly decrease in FY 2024. The current estimate of the company’s EPS is $7.14 in FY 2024, a reduction of over 22% from the previous year.

Still, analysts expect EPS to recover sharply from FY 2025 onward. For instance, its EPS is expected to be $7.76 and $8.35 by the end of FY 2025 and 2026 reflecting a potential growth of 8.61% and 7.67% respectively. Altogether, it is predicted to reach its EPS of approximately $10 in about five years.

3M's Valuation and P/E Ratios Compared to Sector Medians

Based on the MMM stock’s valuation grade, the P/E ratios of this company are far less than the sector median. For the next year and the current fiscal year 2024, MMM’s forward P/E ratio is 14. In terms of the sector median, this is equal to or greater than 18x which means the stock is trading at a discount of 23.6% to its peers. The 5-year rolling average for MMM’s P/E ratio is slightly above 15x, making it about 10% higher than its current FWD P/E. These ratios, with the projected growth, would again come down even more steeply – to around 10x only in the next 5 years.

Risks and Challenges Facing by 3M

Regarding the negative aspects, MMM and its industrial counterparts have similar risks, such as recessions, which can greatly decrease the level of consumption of industrial goods. Further, fluctuations in the prices of the commodities and persisting inflation in terms of labor cost, and variable cost can greatly affect profit margins.

Another potential risk that is unique to MMM is that the company may eventually achieve a state of stagnant innovation. MMM has traditionally been a world-leading country in new product development, but in the recent past, some investors are concerned they are losing this particular kind of edge.

Stocks.News does not own positions in companies mentioned.