3M investors received some welcome news this week with the company's strong earnings report, but the specter of "forever chemicals" litigation continues to haunt its stock.
Analysts point to PFAS liability as a ding on 3M stock
Company's Q4 profit exceeded forecasts but cloud of litigation hangs over the manufacturer.
January 30, 2021 at 1:14AM
And if the chemicals known as PFAS are deemed hazardous by the federal government — a greater possibility under new President Joe Biden and a Democratic Congress — 3M's legal woes could grow.
"We expect PFAS concerns to continue weighing on the stock … particularly after the Blue Wave scenario came true," Deutsche Bank analyst Nicole DeBlase wrote in a research note this week, referring to Democratic election victories.
Such concerns are common among stock analysts, even though many were enthused that the company's fourth-quarter profits handily exceeded forecasts and that 3M's prospects for 2021 appear much improved.
3M has long been a leading maker of per- and polyfluoroalkyl substances, or PFAS, a family of chemicals used in products from fabric protectors to firefighting foam. But the chemicals don't break down in the environment and have been linked to a host of diseases.
3M stopped making two controversial PFAS compounds — PFOA and PFOS — in 2002.
The Maplewood-based manufacturing giant has been hit with a landslide of lawsuits over its past PFAS production, including one that led to an $850 million settlement in 2018 with the state of Minnesota.
3M has since earmarked hundreds of millions of dollars more to cover further settlements and court awards, though analysts believe the final tab could be several billion dollars.
Deane Dray, a stock analyst at RBC Capital Markets, wrote in a Jan. 21 report that 3M faces more than 300 individual and class-action suits pertaining to PFAS liabilities.
Dray and other analysts said that 3M's stock, which closed Friday at $175.66, already trades at a significant discount to its peer companies because of PFAS litigation.
"The market is arguably assuming 3M's PFAS risk equates to approximately $21 billion in market cap, nearly a quarter of 3M equity value," Dray wrote.
RBC's $193 price target for 3M shares assumes that the stock trades at a 15% discount.
In 2019, the Democratic-controlled U.S. House of Representatives passed a bill that would essentially designate PFOS and PFOA as hazardous substances.
Such a measure could force manufacturers to help pay for cleanup under the federal Superfund law.
The bill did not pass in the then-Republican-controlled Senate, but the political calculus has changed with a Democratic majority — albeit thin — in the upper chamber.
"With the recent 'Blue Wave' in the U.S. Congress, we believe that there could be fewer political hurdles to clear for increased scrutiny of PFAS chemicals," Dray wrote. "Specifically, we believe the likelihood of EPA designating PFAS as a 'hazardous substance' is significantly greater."
Andrew Obin, an analyst at Bank of America, agreed in a report earlier this month, noting, too, that the U.S. Environmental Protection Agency (EPA) will likely be more aggressive under Biden.
Michael Regan, Biden's EPA nominee, led the North Carolina Department of Environmental Quality when the state cracked down on Chemours for PFAS contamination, Obin noted. Chemours is a corporate spinoff from PFAS maker DuPont.
"We expect headline risk on legislation and litigation to accelerate," wrote Obin, who earlier this month downgraded his rating on 3M to "underperform."
Stephen Tusa, a stock analyst at JPMorgan, acknowledged PFAS risks in a report this week, but upgraded 3M to "overweight" after the company's encouraging earnings report and 2021 forecast.
"While we continue to believe there are structural concerns in the business model here and PFAS remains a concern, the stock is cheap," Tusa wrote. "The deep discount PFAS is placing on the stock … is even more unwarranted when looking at [3M's] earnings quality."
On Tuesday's earnings conference call, three stock analysts asked 3M executives about PFAS litigation.
Mike Roman, 3M's CEO, said that a bellwether PFAS case scheduled in Michigan had been postponed. But he didn't offer any further specifics.
"We continue to focus on proactively managing PFAS," he said. "We'll update as we go."
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