3M upgraded to Equal weight at Morgan Stanley as shares reflect risks

3M (NYSE:MMM) on Thursday was upgraded to Equal weight from a previous investing rating of Underweight by analysts at financial-services firm Morgan Stanley. They said the manufacturing conglomerate’s stock price better reflects its potential legal costs and ability to increase profit margins.

“3M's (MMM) liabilities are likely to grow but look better discounted into shares,” Joshua C. Pokrzywinski, analyst at Morgan Stanley, said in an August 31 report. “Following the significant underperformance over the past few years, we see risk/reward as more balanced, though still with a very wide range of outcomes.”

The biggest risk is that 3M’s (MMM) legal liabilities will be bigger than what Morgan Stanely estimates as a base case. In the past three months, 3M (MMM) struck a tentative deal to pay as much as $10.3 billion to settle water-pollution claims related to PFAS, or what are known as “forever chemicals.” It also agreed to pay $6 billion to thousands of veterans who claimed that 3M’s (MMM) combat earplugs were defective.

PFAS lawsuits over wastewater, international water suppliers and personal injury or property damage may cost 3M (MMM) billions more in damages, according to Morgan Stanley. The firm also expects plaintiffs with the strongest claims of hearing injury to opt out of the proposed earplugs settlement, given the average damages award in test cases that went before a jury was about $26 million.

Morgan Stanley’s base-case estimate for 3M (MMM) includes a total of $25 billion in liabilities for PFAS and $8.5 billion for earplugs.

The firm raised its price target for 3M (MMM) to $113 a share from $102 a share, based on an enterprise value-to-Ebitda multiple of 11.5 times.

“The market has priced in adequate risk particularly as the recent settlement agreements narrow the range of potential outcomes,” according to Morgan Stanley. “Fundamentals likely stabilize and improve as well with consensus assuming little margin expansion even with significant restructuring underway.”