3M Company (MMM) and Honeywell International Inc. (HON) are two diversified industrial, technology, and manufacturing companies, with steady growth, strong ROE and cash flow and a healthy balance sheet. Both companies had received positive calls from analysts and will be analyzed fundamentally and technically. Investing strategies will also be presented.
MMM was down 0.68% and closed at $104.94 on March 21, 2013. MMM had been trading in the range of $81.99-$106.88 in the past 52 weeks. MMM has a market cap of $72.41B with a low beta of 0.88.
On March 21, 2013, Goldman Sachs resumed coverage on MMM with a neutral rating and $115 price target, note solid innovation and balance sheet but bad timing. The analyst said,
Given our near-term outlook and the defensive (e.g., Healthcare, C&O)/early cycle (e.g., D&G, electronics) nature of 3M's businesses, we do not believe now is the time to own MMM shares. Notably, MMM tends to outperform coverage during downturns/the early stages of a recovery.
Analysts currently have a mean target price of $108.20 and a median target price of $110.00, suggesting 3.1%-4.82% upside potential. Analysts, on average, are estimating an EPS of $1.65 with revenue of $7.80B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $6.83 with revenue of $31.45B, which is 5.20% higher than 2012.
As presented at Bank of America Merrill Lynch global Industrial & EU Autos Conference, 3M's management rolled out its plan to increase its R&D spending for the next 5 years. In the last decade, the company had been running R&D in the 5% to 5.5% of revenue zone. 3M now intends to look for investments toward longer-term, higher risks breakthrough technology opportunities.
There are a few positive factors for MMM:
- Higher revenue growth (3-year average) of 9.0 (vs. the industry average of -0.4)
- Higher operating margin of 21.7% and net margin of 14.9% (vs. the industry averages of 16.3% and 8.8%)
- Stronger ROE of 26.9 (vs. the average of 15.4)
- Lower debt/equity of 0.3 (vs. the average of 1.1)
- Lower P/E of 16.7 (vs. the industry average of 21.2)
- Lower Forward P/E of 13.3 (vs. the S&P 500's average of 13.9)
- MMM generates an operating cash flow of $5.30B with a levered free cash flow of $3.79B
- MMM currently offers an annual dividend yield of 2.42%
Technically, the MACD (12, 26, 9) indicator is showing a bearish trend, and the MACD difference continues to diverge. The momentum indicator, RSI (14), is declining but still indicating a slightly bullish lean at 56.61. MMM is currently trading above its 50-day MA of $101.88 and 200-day MA of $92.69. The next resistance is $105.72, the R1 pivot point, followed by $107.44, the R2 pivot point, as seen from the chart below.
How to Invest
MMM remains as one of the most reputable company associated with innovation. With solid fundamentals, MMM remains a great long-term holding. In the near-term, the technical trend is weakening after the recent run-up. As supported by Goldman Sachs' call, the upside potential is limited at current valuation in the short-term. For bullish investors, a credit put option spread of May 18, 2013 $97.5/$100 put can be reviewed, which will allow investors to gain some upside credit premium or allow investors to buy MMM shares at a price below $100 upon option expiration. Investors can also review the following ETFs to gain exposure to MMM:
- Dow Jones Industrial Average ETF (DIA), 5.60% weighting
- Industrial Select Sector SPDR (XLI), 4.62% weighting
- Dividend Appreciation ETF (VIG), 3.22% weighting
Honeywell International Inc.
HON was down 0.15% and closed at $74.59 on March 21, 2013. HON had been trading in the range of $52.21-$75.00 in the past 52 weeks. HON has a market cap of $58.46B with a beta of 1.37.
On March 21, 2013, Goldman Sachs resumed coverage on HON with a buy rating and $88 price target, saying it's not too late to own the stock. As quoted from Goldman's report,
Goldman likes the company's leadership positions in attractive end markets like commercial aerospace, process management and technology licensing for refineries and petrochemical plants; see several opportunities for HON to achieve new margin peaks; multiple expansion can occur given its late cycle leverage and trading history towards the later stages of the last cycle.
Analysts currently have a mean target price of $77.00 for HON, suggesting 3.23% upside potential. Analysts, on average, are estimating an EPS of $1.14 with revenue of $9.44B for the current quarter ending in March, 2013. For 2013, analysts are estimating an EPS of $4.94 with revenue of $39.38B, which is 4.60% higher than 2012.
On March 21, 2013, Honeywell announced an agreement to upgrade wastewater treatment plants for the Puerto Rico Aqueduct and Sewer Authority, the largest water and wastewater utility in North America, serving more than 97 percent of Puerto Rico's businesses and 3.7 million residents. The energy-savings program will start with $16.3M in improvements at treatment plants in Barceloneta and Caguas, Puerto Rico. The work is guaranteed to save the authority almost $2.7M in annual energy and operating costs. In addition to the equipment upgrades, Honeywell will provide ongoing service and maintenance to help ensure the new technology operates effectively.
There are a few positive factors for HON:
- Higher revenue growth (3-year average) of 6.8 (vs. the industry average of -0.4)
- Stronger ROE of 24.6 (vs. the average of 15.4)
- Lower debt/equity of 0.5 (vs. the average of 1.1)
- Lower P/E of 20.2 (vs. the industry average of 21.2)
- Lower Forward P/E of 13.6 (vs. the S&P 500's average of 13.9)
- HON generates an operating cash flow of $3.52B with a levered free cash flow of $2.58B
- HON currently offers an annual dividend yield of 2.20%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend, but the MACD difference continues to converge. RSI (14) is indicating a strong buying momentum at 74.14, where above 70 is considered as overbought. HON is currently trading above its 50-day MA of $69.78 and 200-day MA of $61.47, as seen from the chart below.
How to Invest
With its narrow-moat and focus on efficiency, HON is expected to grow continuously. With estimated 10.42% annual EPS growth rate for the next 5 years, HON has more upside potential in the long-term. In the short-term, HON is still bullish, technically. For bullish investors, a credit put option spread of May 18, 2013 $65/$70 put can be reviewed. Investors can also review the following ETFs to gain exposure to HON:
- Industrial Select Sector SPDR , 3.97% weighting
- Dow Jones U.S. Industrial Sector Index Fund (IYJ), 2.66% weighting
Note: All prices are quoted from the closing of March 21, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.