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Introduction

3M (NYSE:MMM) is a growth story that never gets old. The company shows a lot of potential in emerging markets, due to the size of its business portfolio. The company offers a lot of capital goods and productivity enhancing products in many different industries. 3M continues to maintain its advantage by continuing to invest heavily into its research and development while improving free cash flow. The favorable economic condition keeps me upbeat on the company going forward.

Qualitative Analysis

Source: Information pertaining to MMM came from the shareholder annual report, shareholder quarterly report, Schlumberger Investor Presentation, along with YCharts.

3M has a really diversified business portfolio. The key segment growth is in Display and Graphics, Consumer and Office, along with the Healthcare.

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  • Display and Graphics provides optical film solutions for LCD displays, commercial graphics, and traffic safety. The optical film business is engaged in LCD computer monitors, LCD televisions, hand-held devices such as phones and tablets, note book PCs, and automotive display. The advanced material division for LCDs is the fastest growing division of the company at 10.6% growth over the previous year. With so much growth in smart phone's, and electronic consumer devices, it is not surprising at all, to find this the fastest growing division at 3M.
  • The Consumer and Office division provides a plethora of products. The products include but are not limited to: Scotch Tape, Glue sticks, Post-it Notes, Note Pads, Scrub Sponges, and etc. Demand for glue, and paper is likely to go up because it's really hard to replace the utility of writing something on a sticky note, or ignoring the use of glue in kindergarten class rooms. International demand is likely to keep this division growing.
  • The healthcare division provides a variety of products. The products include medical tapes, dressings, wound closure products, orthopedic casting materials, infection prevent surgical drapes, masks, sterilization equipment, drug delivery systems, and etc. With an aging American populace plus emerging market demand, this division is likely to grow at very reasonable rates for many years to come.

3M's growing business units are both stable and sustainable. The company is diversified but its principle areas of business are highly profitable. The products 3M provides are patentable. 3M's products have been patented and trade-marked. The company's unique product portfolio will continue to succeed. The company is on the right track, as management continues to set aside cash for research and development.

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Research and development spending per year has increased at a fairly a reasonable rate. The research and development spending is above the 10-year average. In 2011 and 2012 the R&D spending is above average, which implies that management is increasingly emphasizing product development in order to sustain its growth. The company has had a successful history of developing and marketing products in its various business segments. Past results are not always indicative of future outcomes. But I would like to think that the company's successful track record is worth noting. Furthermore, I anticipate the investments to yield positive results going forward, and that management is effectively deploying capital, which could lead to new product developments that could catch on fire like the post it note, scotch tape, and LCD materials.

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Free cash flow has continued to improve based on the upward slope of the linear trend line (the average). That being the case the Free Cash Flow is above the four-year average. This implies that in the most recent quarter, management has been able to eek out results that have been able to surprise analysts. The consistent improvement in free cash flow generally implies that the company is effective at managing its operations, and that it should be anticipated that the company will be able to return cash to shareholders through buybacks and dividends on an ongoing basis going forward.

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The company's operating margin over the past four-years has been extremely stable. 4th Quarter 2012 operating margins were at its four-year average. 3M's management has extremely effective at improving its operations while it continues to invest into research and development. This further implies that management is effective at optimizing profits without sacrificing future growth. Investors should be able to remain confident in a management team that has been able to return cash to shareholders, maintain profitability, and develop and expand its pre-existing product portfolio. I am optimistic on 3M, and anticipate the company to continue to grow.

Technical Analysis

The stock has been on a continuous up-trend for the past year. The recent surge in price leaves investors questioning whether or not the company is slightly over valued. I think some profit-taking could take place as the latest candle was an inverse hammer formation. This stock formation implies that the stock may be ready to capitulate.

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Source: Chart from freestockcharts.com

The stock is trading above the 20-, 50-, and 200- Day Moving Averages. The stock has broken the upper trend line of the pennant formation. The stock could be due for a minor pullback but remains in a multi-year up-trend.

Notable support is $95.00, $100.00 and $102.50 per share. Notable resistance is $111.00, $123.00 and $135.00 per share.

Street Assessment

Analysts on a consensus basis have reasonable expectations for the company going forward.

Growth Est

MMM

Industry

Sector

S&P 500

Current Qtr.

3.80%

11.60%

-15.10%

10.50%

Next Qtr.

7.20%

49.10%

-2.80%

16.20%

This Year

8.10%

-1.00%

23.60%

8.10%

Next Year

9.50%

30.00%

-10.80%

12.80%

Past 5 Years (per annum)

6.59%

N/A

N/A

N/A

Next 5 Years (per annum)

9.83%

14.48%

14.15%

9.03%

Price/Earnings (avg. for comparison categories)

15.43

14.91

13.62

21.01

PEG Ratio (avg. for comparison categories)

1.57

3.06

0.88

2.16

Source: Table and data from Yahoo Finance

Analysts have reasonable expectations, as analysts on a consensus basis have a five-year average growth rate forecast of 9.83% (based on the above table). This growth rate is below the industry average for next five years (14.48%).

Earnings History

12-Mar

12-Jun

12-Sep

12-Dec

EPS Est

1.49

1.65

1.65

1.41

EPS Actual

1.59

1.66

1.65

1.41

Difference

0.1

0.01

0

0

Surprise %

6.70%

0.60%

0.00%

0.00%

Source: Table and data from Yahoo Finance

The average surprise percentage is 1.8% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2003

$ 3.07

21.98

2004

$ 3.64

18.21

2005

$ 4.07

15.72

2006

$ 5.15

12.79

2007

$ 5.70

12.8

2008

$ 4.95

10.34

2009

$ 4.56

16.67

2010

$ 5.72

14.23

2011

$ 6.05

13.07

2012

$ 6.40

14.42

Source: Data from YCharts

The EPS figure shows that throughout the 2003- 2007 period, the company was able to grow earnings. Throughout 2007-2009 earnings declined. The decline in earnings was due to the great recession. Following the recession the company was able to grow earnings to new all-time highs.

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Source: Data from YCharts

By observing the chart we can conclude that the business is somewhat cyclical and is affected by macroeconomics. Therefore one of the largest risk factors to MMM is the slowing of international gross domestic product growth. So as long as the global economy continues to grow, the company will generate reasonable returns over a five-year time span based on the forecast below.

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By 2018 I anticipate the company to generate $10.91 in earnings per share. This is because of product growth, improving global outlook, cost management, share buybacks, and continued development overseas.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next five years.

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Below is a price chart incorporating the past 10 years and the next six years. Detailing 16 years in pricing based on my forecast and price history on December 31st of each year.

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Source: Data from YCharts and price history is from Yahoo Finance.

Investment Strategy

MMM currently trades at $105.18. I have a price forecast of $102.60 for December 31st 2013. The stock is currently above value, and should be bought at pull backs as a part of a longer-term accumulation strategy.

Long Term

The company is an exceptional investment for the long-term. I anticipate 3M to deliver upon the price and earnings forecast despite the risk factors (competition, regulation, economic environment). MMM's primary upside catalyst is international expansion, product development, share buy-backs, organic growth and cost management. I anticipate the company to deliver upon my forecasted price target of $163.83 by 2018. This implies a return of 72.51% (including dividends) by 2018. This is a great return for a capital goods stock.

Year

Dividend Yield @ $105.18 per share

Cumulative Total

2012

2.41

2.41

2013

2.51

2.51

2014

2.62

5.13

2015

2.73

7.86

2016

2.84

10.70

2017

2.96

13.66

2018

3.09

16.75

MMM has a market capitalization of $72.6 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity. The risk is modest (0.9 beta).

Conclusion

3M has its hands in everything but at least it is good at it. The company is well-managed and well-positioned to grow going forward. The conclusion is simple: buy 3M.

Source: 3M Future Remains Bright