Why 3M Stock Rose 23% on Friday (and How Investors Should Have Seen It Coming)

To be sure, it was a solid quarter. Management raised full-year financial guidance. 3M now expects earnings per share of about $7.15. The midpoint of prior guidance was $7.05.

Still, a 1.4% boost to guidance leading to a 23% gain? It’s fair for investors to ask what just happened.

For starters, it wasn’t short covering. Short sellers borrow stock they don’t own and sell it, betting that prices will drop. That way they can repurchase shares at a lower price and return them, pocketing the difference.

A lot of short selling can result in a short squeeze, when good news forces all the short sellers to buy at once, pushing share prices higher.

Only about 1.4% of 3M shares available for trading have been sold short, according to FactSet. The average for stocks in the S&P 500 is about 2.7%. 3M stock just isn’t a popular short sale. High short interest for an S&P 500 stock is north of 10%. About 17% of

American Airlines

shares available to trade have been sold short, the highest in the index.

The simpler answer for 3M’s stock jump is growth. New CEO William “Bill” Brown succinctly articulated his plans to drive growth at 3M through a renewed focus on innovation, business execution, and capital deployment, which includes M&A.

“Being operationally excellent … we can reinvest some of the productivity saving back into growth in sales force, R&D, whatever it happens to be,” Brown told Barron’s, adding “Part of my role is to look at the portfolio businesses that we’re in—things that we have that are better owned by somebody else as well as assets that are owned by somebody else that could drive value for our owners.”

It’s a sensible plan and investors were pleased—and surprised—but they could have known. Brown has been talking about all that since taking over at 3M in May.

BofA Securities analyst Andrew Obin upgraded 3M shares in June, raising his rating to Buy from Hold. His price target was increased to $120 a share from $105.

“3M has publicly posted a video message he sent to employees on 5/12. Brown has clearly stated that innovation-driven organic growth and operating efficiency are his two top priorities,” wrote Obin. “The video demonstrates that Brown has spent his first days at 3M’s manufacturing and R&D facilities, the two areas of the company which historically have been at the heart of 3M’s culture.”

The plan has been out there, but investors finally got the message.

Following the 23% move, 3M shares now trade for about 16 times estimated 2025 earnings, up from about 13 times before the report. Investors have decided to treat 3M again like a company that can grow. Or they decided to give Brown some credit for growth down the road.

The

S&P 500

trades at almost 20 times estimated 2025 earnings. 3M used to trade for a market multiple. It hasn’t since mid-2020. It’s now closer to the S&P 500 PE ratio than it has been since 2022.

The quarter prompted an upgrade from Wall Street. Deutsche Bank analyst Nicole DeBlase took her rating to Buy from Hold. Her price target went to $150 a share from $110. She was “very impressed” with Bill Brown’s first quarterly report as CEO.

Overall, 56% of analysts covering 3M stock rate shares Buy. In May of 2023, no analysts rated shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target for 3M stock is about $127 a share. The average price target was up about $6 since the earnings report.

3M stock gave back some of Friday’s gains despite the upgrade and target price increases. Shares closed down 1.5% at $125.16 in Monday trading while the S&P 500 and

Dow Jones Industrial Average

rose 0.1% and dropped 0.1%, respectively.

Coming into Monday trading, 3M stock had risen about 39% this year, almost 24 percentage points better than the

S&P 500.

Write to Al Root at allen.root@dowjones.com