Here's My Top Value Stock to Buy for 2025

It's far from clear where the economy is heading in 2025, but that isn't the sole focus of investors in 3M (MMM 0.13%). Instead, they're most likely hoping that CEO Bill Brown's plans to rejuvenate the company's fortunes will significantly release shareholder value.

It's essentially a self-help story, and if it comes to fruition with the aid of the economy, then 3M can have a great year. It's a stock with excellent upside potential, limited downside, and an outstanding value proposition. 

3M's potential is significant

Anyone who doubts the potential for a restructuring to increase shareholder value at an industrial company materially needs to look no further than 3M's peer -- Illinois Tool Works (ITW 0.90%).

In the decade after Illinois Tool Works initiated its highly successful business-model change, its profit margin expanded significantly -- and the market rewarded it with a valuation expansion. In other words, there were more earnings, and the market was willing to pay more because of them. The subsequent price appreciation in the stock was spectacular.

ITW data by YCharts.

That said, Illinois Tool Works and 3M are very different companies. Where the former relies on a "customer back" approach by constantly innovating its products in line with its customers' feedback, 3M is a company that relies on research and development (R&D) to produce innovative and differentiated products that command natural pricing power.

Unfortunately, 3M lost its way over the last decade, failing to produce enough innovative products to drive significant sales growth. Moreover, the company's sales growth has constantly fallen short of expectations.

At the same time, the previous management devoted a lot of time, capital (the former CEO Mike Roman made billions of dollars worth of acquisitions and divestitures), and effort to revamp its healthcare business, and it's debatable whether it had significant success.

Image source: Getty Images.

Meanwhile, not only did 3M deliver lackluster growth over the last decade, but it also delivered growth significantly below what management had expected. Consequently, the company became structured for growth that wasn't forthcoming. Given the overly optimistic outlooks, the necessity for investment in R&D was possibly not seen as apparent as it might have been.

The case for buying 3M stock in 2025

Many of these problems were identified by former CEO and current Executive Chairman Roman, and he put in place a series of restructuring actions, including substantive job cuts, pruning 5% of less profitable consumer products sales, cutting facilities, and reducing management layers. The company benefited from them in 2024.

With those initiatives largely over and the healthcare business spun off in 2024 (with more benefit on cost due in 2025), 3M is set up nicely for growth in 2025. Brown has an opportunity to build on the groundwork for the recovery made by Roman.

Data source: 3M presentations.

As such, the case for buying the stock rests on two factors:

• The ongoing benefit of the restructuring actions taken by Roman
• New CEO Bill Brown's plan to rectify the issues discussed above, not least by investing in R&D to accelerate new product introductions (NPIs)

Bill Brown's plans

Building on the existing initiatives, Brown plans to revitalize NPIs through focused investment over the long term and fast-tracking product-line extensions in the near term. During the last earnings call, he disclosed that utilization across 3M's major machinery assets averaged 50% at the start of the year. He acknowledged that, "The reality is we should be running; best-in-class companies are in the 80% range or north of that."

Brown wants to improve 3M's ability to deliver on time in full (OTIF) and noted that 3M had previously lost business due to this issue. He believes consolidating 3M's 25,000 suppliers will help improve productivity by 2%.  As previously noted, the plan to improve inventory-turnover days could significantly increase free cash flow.

A stock to buy

3M hasn't been the best-run company over the last decade. A cynic would focus on the negative, but a glass-half-full approach would outline the significant opportunity to improve key metrics. On that note, the Roman restructuring has demonstrably improved margins, and Brown looks set to tackle the fundamental issues that have prevented 3M from realizing its full potential.

An improved R&D pipeline, a renewed focus on 3M's industrial business (now that the healthcare business has gone), and myriad operational improvements promise to accelerate earnings growth in the coming years. That's why the company is an excellent value opportunity right now.