3M (MMM) is one of the great American industrial companies. The Minnesota-based conglomerate has survived through every economy and market cycle since it went public in 1929. MMM trades at a steep discount to its industrial peers and has a 4% dividend yield. Yet, the stock seems untouchable due to the company's exposure to an unquantifiable liability from a hazardous chemical they produced called PFAS, or per- and polyfluoroalkyl substances.
According to the EPA, PFAS contain chemicals that break down very slowly. Because of their widespread use and persistence in the environment, many PFAS are found in the blood of people and animals all over the world and are present at low levels in various food products and in the environment.
3M settled with Belgium authorities earlier this week for $582 million to fund PFAS remediation associated with their Zwinjdrecht manufacturing facility. Importantly, this settlement doesn't shield 3M from other lawsuits related to soil and drinking water contamination. The liability promoted JP Morgan's top industrial analyst, Steve Tusa, to lower his target on MMM to $125 from $175 -- below the current price of $130.
3M has three similar manufacturing sites in the U.S. and one in Germany, subject to liability for cleanup and remediation costs. The EPA upgraded advisory levels for PFAS on June 15, implying the threshold for sites considered contaminated is near zero. Bank of America believes this could expand the scope of Superfund (also known as CERCLA) cleanup sites and people filing for personal injury claims. States and municipalities with previously higher thresholds will likely follow the lower threshold advisory level. The EPA is on track to classify PFAS chemicals as hazardous substances by summer 2023. Given "joint and several" strict liability of CERCLA, responsible parties will likely legally pursue chemical manufacturers to cover cleanup costs.
The timeline for Superfund cleanup is lengthy and intensive. According to a recent Bank of America conference on PFAS, the preliminary assessment takes one to three years, remedial investigation takes three to six years, remedial design and construction two to four years, remedial operations up to 30 or more years, and long-term management 30 or more years. The Department of Defense is currently in the first two stages, which implies the cleanup process for the private sector will be similarly lengthy.
Arguably, a significant amount of liability is baked into the price of MMM. The stock trades with a low 12-13 price-to-earnings, far below comparable industrial stocks. However, the problem is the uncertain liability and wide range of potential outcomes. Analysts need more clarity on the legal liability before they're willing to recommend the stock -- remarkably, not one firm has a "buy" rating on 3M with 13 "neutrals" and eight "underweights." The overhang can last well into 2023, when the EPA determines whether PFAS is subject to Superfund cleanup. A potential Superfund designation -- ruling the PFAS is a hazardous chemical -- likely sets off a string of lawsuits for 3M and several other chemical producers.
Although 3M is trading at a relatively cheap valuation, the shares ought to be avoided until the company's legal liability is contained. Perhaps the 4.5% dividend yield gives investors enough incentive to stay aboard until the storm passes, but the shares are likely to tread water, at best. Probably best to avoid the stock and the legal morass.
