The Biggest Risk for 3M Investors

By Markets Fool.com

Image source: 3M

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Like the heavy-duty duct tape it makes,3M is a strong company. But no company -- or adhesive tape, for that matter -- is completely immune from risk. The biggest risk to the company by far, though, is litigation.

Chemicals and courtrooms
Lawsuits are the bane of any chemical company's existence. If a popular product turns out to be hazardous, or if the manufacturing process proves harmful to people or the environment, a company can potentially be on the hook for billions of dollars in legal fees, fines, or damages. One company that understands this all too well is 3M rivalDuPont, which spun off some of its chemicals businesses -- and the legal liability for those businesses -- into a new company,Chemours in 2013.

In its most recent 10-K form, 3M discusses some of the existing lawsuits against it, and there are a lot of them. Like Chemours, the company is facing lawsuits related to asbestos exposure (at the time it was spun off from DuPont, Chemours estimated it was facing 2,400 pending asbestos-related lawsuits alone) and environmental damage.

3M does make provisions for the outcomes of such lawsuits, including taking out insurance policies and/or setting aside cash to cover the costs. But even so, as the company notes:

"Becauselitigationissubjecttoinherentuncertainties,andunfavorablerulingsordevelopmentscouldoccur, there can be no certainty that the Company may not ultimately incur charges in excess of presently recorded liabilities. A future adverse ruling, settlement, or unfavorable development could result in future charges that could have a material adverse effect on the Company's results of operations or cash flows in the period in which they are recorded."

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And there may be a huge "unfavorable development" arising in the near future,dealing with the harmful effects of a chemical called PFOA.

Ill effects
Without getting too technical, PFOA is a compound that 3M manufactured and that DuPont's Teflon products used for decades. Additionally, while it didn't contain PFOA, 3M's original formula of ScotchGard broke down into PFOA.Recent studies have established a'probable link'' between PFOA and various cancers, thyroid disease, and high cholesterol, among other serious health conditions.

Recently, 200 scientists signed The Madrid Statement, calling on governments and manufacturers to restrict the usage of PFOA and other related chemicals only to essential uses. The damage, though, may already be done: PFOA has been found in the bloodstreams of people and animals around the globe. You have PFOA in your bloodstream right now.

The nightmare scenario
From a medical and environmental standpoint alone, this is frightening (and I'm not exaggerating -- in lieu of seeing a horror flick, just read this recent article from The New York Times).From an investing standpoint, though, it could be catastrophic. Depending on how much PFOA is harmful to humans -- and it could be as little as 0.001 parts per billion, -- the resulting legal claims against 3M and DuPont/Chemours could easily run into the tens of billions of dollars, or more.

In fact, more than 3,500 people have already filed PFOA-related personal-injury lawsuits against DuPont. The first of these cases, last October, resulted in a $1.6 million judgment against DuPont, which the company has appealed. But multiply $1.6 million times 3,500, and you can see how the potential liabilities skyrocket.

Even though 3M stopped all manufacture and use of PFOA in 2008, three purported class action lawsuits revolving around PFOA exposure are already pending against 3M. The first class certification hearing is scheduled for this November. And these lawsuits could be just the tip of the iceberg.

The Foolish bottom line
It's hard to overstate the possible negative effects that PFOA lawsuits could have on 3M and its bottom line. And since the company doesn't manufacture PFOAs anymore, it has no existing product line that it can spin off, as DuPont did with Chemours -- not to mention that the company's reputation would certainly be tarnished if one of its chemicals was found to have caused widespread damage and suffering.

Of course, it could transpire that PFOA is safe in higher concentrations than previously thought, or that 3M simply isn't held legally liable for the chemical's presence in the environment, people, and animals. But if you're a 3M investor, you'll want to keep a close eye on how the first class action suit goes in November: It could be the beginning of a rough road for the company.

The article The Biggest Risk for 3M Investors originally appeared on Fool.com.

John Bromels has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.