The industrial sector is the backbone of the global economy. The sector faced a significant downturn in demand last year due to the COVID-19 pandemic. The contagion brought global industrial activities to a halt due to the unprecedented manufacturing shutdowns, leading to a slump in demand for products in the key markets.
However, a strong recovery in the industrial space is underway as reflected in recent upbeat manufacturing data. U.S. industrial production grew 0.9% in January 2021 compared to the consensus estimate of an 0.5% increase. Consequently, General Electric Company (GE) and 3M Company (MMM), two leading industrial stocks, are setting up to offer attractive returns.
Both stocks generated decent returns over the past year. While GE returned 24.2% over this period, MMM gained 27.1%. However, in terms of year-to-date performance, GE is a clear winner with 24.4% returns versus MMM’s 2.7%. But which of these stocks is a better pick now? Let’s find out.
Business Structure and Latest Movements
GE operates as a high-tech industrial company in the United States, Europe, and internationally. It operates through power, renewable energy, aviation, and healthcare segments. For more than 125 years, GE has been the handmaiden of industrial growth and innovation. Today, the company boasts 7,700 gas turbines for power generation, 45,000 onshore wind turbines for renewable energy, 64,000 aircraft engines, and 4 million installed healthcare bases.
Last month, Norway became the eighth country in Europe to install the GE Green Gas for Grid (g³) gas-insulated line (GIL) and busbars (GIB), an alternative to sulphur hexafluoride that is traditionally used in high-voltage substation equipment. GE’s technology will help Norway’s transmission grid operator Statnett to meet its goal of reducing its greenhouse gas emissions by 25% in 2025. In addition, GE, through its Canadian subsidiary, signed a memorandum of understanding with Magellan Aerospace Corporation to deliver engine sustainment support for Canada’s future fighter.
MMM develops and manufactures various products worldwide related to electronics, telecommunications, industrial, consumer and office, health care, safety, and other markets. It operates through four business segments – safety and industrial, transportation and electronics, health care, and consumer.
MMM recently collaborated with Palantir Technologies Inc. (PLTR) in a multi-million-dollar expansion deal. The company aims to expand its use of PLTR’s foundry platform in its ongoing digital transformation to build a dynamic supply chain and be able to respond nimbly to changes in demand across tens of thousands of products. Also, in December, 3M Littmann Stethoscopes partnered with eMurmur to release two new educational apps designed to support healthcare/medical students and professionals. The app is designed to help users better recognize pathological heart sounds and murmurs.
Recent Financial Results
In the fourth quarter that ended December 31, 2020, GE’s revenue declined 16% year-over-year to $21.93 billion. Its total orders dropped 7% compared to the prior year to $23.2 billion. However, its renewable energy segment witnessed robust growth during the quarter. Orders of $6.3 billion were up 32% organically, driven by large onshore wind equipment orders in North America, as well as GE’s first Haliade-X order in offshore wind. Its adjusted EPS for the quarter came in at $0.08, significantly lower than the year-ago value of $0.20.
MMM’s sales increased 5.8% year-over-year to $8.58 billion in the fourth quarter ended December 31, 2020. This was driven primarily by strong end-market demand for personal safety, home improvement, general cleaning, semiconductor, data center and biopharma filtration products. In fact, MMM witnessed organic growth across all business groups and geographic areas. Its EPS came in at $2.38, rising 43.4% compared to the year-ago value of $1.66.
Past and Expected Financial Performance
GE’s revenues and total assets have both declined at CAGRs of 7.1% and 11.8%, respectively, over the past three years. The company’s free cash flow has also deteriorated at a CAGR of 3.5%.
Analysts expect GE’s revenue to decline 11.1% in the current quarter (ending March 31, 2021) but improve 1.6% in the current year and 5.8% next year. GE’s EPS is expected to decline 60% in the current quarter but rise 2,400% in the current year and 100% next year. Also, its EPS is expected to grow at a rate of 311.4% per annum over the next five years.
On the other hand, MMM’s revenue and total assets grew at CAGRs of 0.6% and 7.6%, respectively, over the past 3 years. The CAGR of the company’s free cash flow has been 13.3%.
Analysts expect MMM’s revenue to increase 5.2% in the current quarter (ending March 31, 2021), 6.8% in the current year and 3.9% next year. The company’s EPS is expected to grow 6.5% in the current quarter, 9.7% in the current year and 8.4% next year. MMM’s EPS is expected to grow at a rate of 7% per annum over the next five years.
GE’s trailing-12-month revenue is nearly 2.5 times MMM’s. But MMM is the more profitable with a gross profit margin of 48.7% versus GE’s 17%.
MMM’s ROTC and ROA of 13.8% and 9.6%, respectively, compare favorably with GE’s negative value.
In terms of forward p/e, GE is currently trading at 179.20x, 866% more expensive than MMM, which is currently trading at 18.55x. However, GE is less expensive compared to MMM in terms of trailing-12-month p/s (1.48x versus 3.20x).
In terms of trailing-12-month price/cash flow, GE’s 32.76x is 157.7% higher than MMM’s 12.71x.
MMM looks much more affordable here.
MMM has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. However, GE has an overall rating of C, which translates to Neutral.
MMM has a Quality Grade of A, which is consistent with its strong fundamentals. Here, the bleak prospect of GE is evident in its Quality Grade of C.
In terms of Stability Grade, MMM has a B grade, reflecting that the stock is less volatile compared to its industry peers. In contrast, GE has been graded C.
Of 46 stocks in the A-rated Industrial – Manufacturing industry, GE is ranked #38. In comparison, MMM is ranked #48 in the 87-stock A-rated Industrial – Machinery industry.
Beyond what I’ve stated above, our POWR Ratings system has also rated GE and MMM for Growth, Value, Momentum and Sentiment. Get all the GE ratings here. Also, Click here to see the additional POWR Ratings for MMM.
With investors optimistic about a sharp economic recovery this year, investing in industrial stocks is a wise strategy because the sector is strongly correlated with overall economic performance. Hence, both GE and MMM are good long-term investments considering their market dominance and the strength exhibited by both the companies last year. However, MMM appears to be a better buy based on the factors discussed here.
MMM is a relatively cheaper option on which to bet based on it advancing its operating model, streamlining its business operations, and focus on global trends. The company is investing strategically in research and development and innovating fast to improve its supply chain system. Hence, we believe, MMM is a better option on which to bet on the immense growth potential of the industrial sector.
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GE shares rose $0.13 (+0.96%) in after-hours trading Thursday. Year-to-date, GE has gained 25.65%, versus a 0.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More…
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