This Cheap Stock Has Double-Digit Upside Potential

Shares of industrial conglomerate 3M (NYSE:MMM) have been under tremendous pressure over the past year, as MMM stock has dropped from $220 in early 2019 to $150 today, amid persistently sluggish industrial economic growth in China, the U.S. and pretty much everywhere else across the globe.

But, I think that the worst of this global industrial slowdown is over, and 3M stock is ready to rip higher in 2020 by more than 20%.

Specifically, it increasingly appears that — once the coronavirus outbreak in China subsides (and it will, soon) — global economic activity will rebound sharply and quickly, especially in the industrial and manufacturing sectors.

As it does, 3M’s revenue growth trends will meaningfully improve.

At the same, management has announced significant restructuring and cost-cutting initiatives, the sum of which will drive margin expansion in 2020, too.

Recharged revenue growth and margin expansion will power reinvigorated profit growth at the industrial conglomerate. That’s the good news. The better news for bulls? The stock presently trades at a five-year low valuation of just 15.7x forward earnings.

What do you get when reinvigorated profit growth converges on a five-year low valuation? A sharp jump in the stock price. That’s exactly what will happen to 3M stock in 2020.

Coronavirus Won’t Last
When you take a step back and look at the big picture, it becomes increasingly obvious that the global industrial economy is set for a significant re-acceleration over the next few quarters.

Right now, China’s industrial sectors is getting hit hard by coronavirus, which has forced multiple factories and manufacturing sites to temporarily shut down. Those closures are disrupting global supply chains, slowing manufacturing around the world thanks to the coronavirus.

But, this all just temporary.

Soon enough, like all other epidemics, the coronavirus outbreak will pass. Chinese factories and manufacturing sites will re-open. Global supply chains will be fixed, and the industrial economy will stop slowing.

Growth Trends Will Improve
More than that, the industrial economy should actually push higher in 2020, for a few reasons.

First, in response to the coronavirus outbreak, the People’s Bank of China and many other central banks across Asia have injected a ton of fiscal stimulus into their respective economies. That provides ample firepower for a sharp economic rebound once virus fears subside.

Second, also partially in response to the coronavirus, China has been more open to trade negotiations with the U.S. This increased openness will continue, because China doesn’t want to upset its already fragile economy, so trade tensions will meaningfully de-escalate in the coming months.

Third, with stability set to be re-injected into the global geopolitical environment, corporations are set to re-accelerate their capital spending plans in 2020. Capital spending is the backbone of the industrial economy. Thus, as capital spending trends improve on the back of easing trade tensions, industrial economic activity will rebound.

Fourth, the industrial economy was already rebounding prior to the coronavirus outbreak. Just look at Purchasing Managers Index readings from across the globe in the back half of 2019 and into January. They were rebounding, everywhere, because of supportive central bank policies and easing trade tensions.

Come mid-2020, there will be more fiscal stimulus and more trade tension de-escalation, so this rebound will likely kick into second gear.

3M Stock is Too Cheap
Given that the industrial economy is set to rebound in 2020, 3M stock is simply too cheap for its own good here and now.

That five-year low valuation got down there because the company’s growth trends decelerated in 2019, amid sluggish industrial growth across the globe.

But, as industrial growth picks up in 2020, 3M’s growth trends will pick back up, too. When that happens, the current discount in the stock should disappear.

So, throughout 2020, 3M stock should power higher, supported by renewed profit growth and steady multiple expansion.

How much firepower does this rally have? Consensus 2021 sell-side earnings per share estimates sit around $10. The stock’s five-year average forward earnings multiple — and the average forward multiple for industrial conglomerate stocks — is 20x. Combine those two, and you arrive at a reasonable 2020 price target for the stock of $200.

Bottom Line on MMM Stock
It’s been a rough run for MMM stock over the past few years amid sluggish industrial growth across the globe. But once coronavirus fears subside, those sluggish industrial growth trends should materially improve on the back of easing trade tensions and supportive monetary policy.

As those growth trends bounce back, so will 3M stock.

— Luke Lango

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Source: Investor Place