Last time I looked at 3M (MMM) it had gapped way down. I was of the opinion that the stock would continue to move down, and for this reason I initiated a short term income play on the stock. I am right more often than I am wrong on these types of plays, but this time I was wrong. Here is the play I suggested:
The Options Play
The stock is presently trading at 87.54 and I am apt to look for a short term income trade on the bearish side since I have made good on the last trade and the stock will continue in this direction.
- Buy the January 2013 put with a strike of '87.50' (priced at $3.15)
- Sell the January 2013 put with a strike of '85.00' (priced at $2.04)
- Net Debit to Start: $1.11
- Maximum Profit: $1.39
- Maximum Risk: net debit
- Maximum Length of Trade: 3 months
Reasoning behind the Trade
- Loss of revenue continues to plague the third quarter leaning bearish.
- Follow the recent trend.
- I see no catalyst turning the stock around in the near future.
The stock went up and filled the gap entirely much to my surprise. I did not see a catalyst for the stock to move up like it did after the third quarter revenue problems. Is the stock going to continue to move up?
3M may have had revenue problems the third quarter, but for the year the company expects to reach its 2012 EPS target of ($6.27 - $6.35). It also anticipates 2013 earnings to be in the range of $6.70 to $6.95 per share with organic local-currency sales growth of 2 to 5 percent for the year. This is good news for a company that was seen to struggle just a quarter ago.
Ceradyne Acquisition
A present struggle does not mean the company will remain that way. With this acquisition, the company is setting itself up for a good position in the future. Ceradyne and 3M will enable advanced ceramics to be developed with new technologies and unique materials then applied where needed. The 3M Advanced Materials Division provides valued materials for lightweight solutions and materials for high performance in harsh environments. Ceradyne is a worldwide leader in the development and production of advanced technical ceramics for demanding applications in the automotive, oil and gas, solar, industrial, electronics and defense industries. Working together, advanced technical ceramics offers a significant advantage over older materials like metals and plastics. This will give 3M an edge in these areas where it's required.
2013 Outlook
Looking at two areas of the company, leadership and "organic growth," let's observe what may happen. It is interesting to me when I speak of leadership for 3M. The evolution of the company is of great interest to me. Having been known for innovation over the years, it was about 10 years ago that the company brought in an outsider as CEO for the first time in its history and the innovative culture changed from that point on. Mr. McNerney brought profitability back to the company with better margins and sustained earnings growth. Recently, a new CEO, Mr. Thulin came from inside the company and we will see if the innovative mentality can be regained.
Organic growth is another area the company needs to do better. For those who need a quick education, organic growth means a business is expanding due to increasing overall customer base, increased output per customer or representative, new sales, or any combination of the above. 3M's organic growth has hovered around an anemic 2%. The company needs to do better.
Long Term Investing in 3M
Is 3M a company that has rested upon its laurels, or is it a company that is innovative and ready to grow and expand? I am not sure if it rests upon its laurels as much as it may be taking an acquisition approach to future expansion. Seeing the company is reaching its 2012 projections and 2013 looks for expansion I would not be adverse to long term investing in the company. A word of caution though-the 2% organic growth is not the best. Explore other competitors and see if there is another alternative with better growth prospects first.
(click to enlarge)
Technically Speaking
The journey of 3M this fall has been a roller coaster ride, with the end results being very little movement. It peaked in October and then gapped way down on poor third quarter numbers. After the gap, it completely filled, and is very close to its original highs. Will it continue to move up? As I observe the RSI indicator, it is in bullish territory and continues to move up with strong momentum so I do not see a slowdown here. The MACD also supports this move as the MA's are parallel to each other. The only indication of a slow down is in the Bollinger Band where I see a double break through the upper band. This second break usually results in a pullback. I cannot say a reverse of direction because the other 2 indicators do not support anything but a limited pullback from the recent high. It looks like that momentum could continue right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
