While 3M Co. wrestled this month with the troubling discovery that its Scotchgard and other nonstick chemicals are seeping into the Mississippi River from its Cottage Grove factory, the company has been benefiting from a different kind of flow on Wall Street.
Investors have been piling back into 3M shares, sending the stock to new highs, though it fell back Tuesday along with most of the market, closing at $89.69, off 1.3 percent.
On Thursday, the Maplewood-based company reports second-quarter earnings, and the day's trading should give some insight into whether the stock's upward move will continue and whether 3M's cleanup costs in Minnesota and elsewhere climb beyond estimates.
Analysts are expecting profit of $1.18 a share on revenue of $6.05 billion.
A year ago, earnings were $1.05 a share.
So far, 3M has set aside $121 million to clean contaminated sites in Oakdale, Woodbury, Cottage Grove and Decatur, Ala. In addition to Cottage Grove, the chemicals in question have been found in 3M's Woodbury disposal site, in wells and groundwater in Lake Elmo and Oakdale, in fish taken from the Mississippi River and from Minneapolis' Lake Calhoun.
New research findings from Cottage Grove have some observers wondering if $121 million will suffice. Earlier this month, a study by a 3M consultant revealed extensive contamination near the 3M Cottage Grove factory that made perfluorochemicals (PFCs) for six decades. PFC levels were the highest measured so far for ground water, sediment and soil taken from beneath coves feeding into the Mississippi. Last year, 3M initially set aside $44 million to deal with its PFC contamination. In April, 3M tripled the amount to $121 million, nipping 10 cents a share from first-quarter earnings.
Cleaning up Cottage Grove alone "is going to be a complicated [process], and it's expensive. There is no getting around it," Minnesota Pollution Control Agency Superfund unit supervisor Doug Wetzstein said. "How much they will ultimately spend we don't know, and we may never know."
Jackie Berry, 3M spokeswoman, said the company "set aside $121 million in the last quarter and can't speculate on any future action."
Investors are clearly betting that the cost to 3M will be containable.
"At the moment, the stock is not reflecting any substantial reserve increase," said David Begleiter, research analyst for Deutsche Bank Securities. It is an issue where it's being closely monitored by the Street. But it's not yet a cause for alarm."
Dmitry Silversteyn, an analyst at Longbow Research, agreed. "For a company that size, I don't want to say $100 million or $200 million [reserve] is insignificant. But it won't move the needle with respect to the value that the rest of the company possesses. If it goes up to $500 million, then it's something that will warrant a closer look," Silversteyn said.
Begleiter said he'd reevaluate his stock recommendation if 3M raises its cleanup reserve to $300 million.
Costs can climb quickly – just ask GE
Environmental cleanups can often be more expensive than expected. General Electric recently announced plans to spend about $500 million to address contamination in the Hudson River in New York.
3M's study earlier this month found that one chemical perfluorooctanoic acid (PFOA)was as high as 619 parts per billion in sampled groundwater near a former dump at the Cottage Grove plant. The recommended maximum level in drinking water is 0.5 parts per billion. PFOA levels in soil samples 2 to 3 feet beneath a fire-training area reached up to 262 parts per billion. Sediment 3 feet under a cove next to the Mississippi had PFOA levels as high as 1,845 parts per billion.
A related chemical perfluorooctane sulfonate was found at levels up to 65,450 parts per billion in sediment in one cove, and 104,000 parts per billion at a former sludge disposal site near the plant.
Cleanup could involve adding carbon filtration systems to a cove that feeds into the river. The site already receives some filtration, Wetzstein said. Contaminated sediment and dirt could be excavated and stored in a newly built containment facility, buried with liners, shipped to specialists out of state, burned or any combination of those, Wetzstein said, adding that a full remediation plan should be determined late in the fall and acted on early next year.
Beyond the pollution issue, Begleiter said he will be curious to see how sales of 3M's optical LCD screens fared during the quarter as kinks in industry inventory levels and 3M factory problems have been worked out. "Demand has been good," he said.
Investors are also paying particular attention to 3M's performance overseas, where growth has been stronger than domestic sales. About 63 percent of revenue comes from outside the country. The foreign sales also protect the company against the weak U.S. dollar.
"International is the story," Begleiter said.
After a stretch of lackluster growth, 3M performed well last quarter. Earnings jumped 52 percent to $1.4 billion, or $1.85 a share, with the help of the sale of its drug division, plus increased sales of retained drug-delivery systems and safety products such as respirators, window film, cleaning and corrosion protection products. The company also had a rebound in its roofing-granules business, which had slumped in the slower housing market.