Morgan Stanley downgrades 3M to underweight, sees legal issues and weak growth holding stock back
The market appears to be underestimating the hit 3M is going to take from ongoing lawsuits, creating downside risk for investors, according to Morgan Stanley. Analyst Joshua Pokrzywinski downgraded the stock to underweight from equal weight, saying in a note to clients that the company's fundamentals would struggle to overcome the hit from lawsuits over an ear protection product and the use of chemicals known as PFAS. "Our analysis of Combat Arms implies that the market's estimate of PFAS has declined (despite negative news flow) or that valuation of the core business is too high," Pokrzywinski said. "While we see the fundamental picture improving through price/cost, overall organic growth remains cloudy as priority platforms are muted by a large, stable portfolio that struggles to outgrow IP given its sheer size and global ubiquity." Morgan Stanley cut its price target for 3M to $150 per share from $185. The stock closed at $154.14 on Wednesday. Shares were off 1.9% in premarket trading Thursday. 3M has been named in thousands of lawsuits over its Combat Arms earplug product, which it discontinued in 2015, according to 3M. For the perfluoroalkyl and polyfluoroalkyl substances, or PFAS, lawsuits, 3M has already logged hundreds of millions of dollars in pretax charges and could have to take more hits in the future. At the same time, 3M has seen its sales and earnings grow at a slower rate than its peers in recent years, Morgan Stanley said. "In other words, after taking into account weaker fundamental performance we think the market appears to be understating the combined liabilities from Combat Arms and PFAS by ~$15B," the analyst said. — CNBC's Michael Bloom contributed to this report.

Traders work under monitors displaying 3M Co. signage on the floor of the New York Stock Exchange (NYSE) in New York. Michael Nagle | Bloomberg | Getty Images