3M Sees Increased Organic Sales Volumes for 2010

Includes: JNJ, KO, MMM, PG, UTX
by: Tom Armistead

Iconic Industrial 3M (NYSE:MMM) recently released guidance for 2010:

...the company anticipates sales of $24.5 billion to $25.5 billion, with organic sales volumes growing 5 to 7 percent and currency effects adding 2 to 3 percent to sales for the year. 3M also expects that 2010 earnings will be between $4.85 and $5.00 per share. 2009 earnings per share are expected to be between $4.30 to $4.35 per share, or $4.50 to $4.55 per share excluding special items. Refer to 3M's October 22, 2009 press release for a complete list and explanation of special items for the first nine months of 2009.

Organic Sales Growth - market response has been unenthusiastic, with the stock trading down by 2% to as low as 76.00 in early trading. This is another case where Mr. Market is missing the point. The point is, organic sales volumes are projected to grow 5 to 7 percent. With all the complaints that companies have been growing profits at the expense of revenue, it is good to see a company that believes they can actually sell more product.

Margins - an issue that needs to be kept in perspective. In 2006 and 2007, 3M reported net income as a percent of revenue at 16.7% and 16.8% respectively, very high by any standard. I estimate that figure at 13.2% for 2009, while the guidance implies 13.9% for 2010. If management meets guidance, they will have increased organic sales while increasing margin, a commendable accomplishment under today's economic conditions.

Valuation – using projected 5 year average EPS, consisting of 3&3/4 years actual plus guidance through 2010, I get 4.97. Over the past 7 years MMM has typically traded around a midpoint of 20 on this metric, while it is currently priced at about 15 X. Looking forward to a year of improving margins and organic growth, there is no reason why the company should not revert to its historical valuation, suggesting a target price of 99.

Opportunity in Blue Chips - the easy money has been made on small tech and beaten down value strategies. Going forward, with interest rates low and business conditions uncertain, large, well-capitalized and relatively steady performers will command a premium. There is a steady drumbeat of recommendations for companies such as JNJ, PG, UTX, KO etc. MMM has been coming up on these lists and deserves the same consideration.

Disclosure: Author holds long positions in JNJ, PG, UTX and MMM, no position KO