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ModernGraham.com is a site devoted to the study and modernization of Benjamin Graham's value investing theories and strategies. The site reviews stocks based on an updated version of Graham's requirements for the Defensive and Enterprising Investors, then values the stock based on a formula included in Graham's The Intelligent Investor. Here is a look at how 3M (NYSE:MMM) fares in ModernGraham's opinion.

Defensive and Enterprising Investor Tests (explanation):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (explanation):

MG Value $98
MG Opinion Overvalued
Value Based on 3% Growth $89
Value Based on 0% Growth $52
Market Implied Growth Rate 5.84%
Net Current Asset Value (NCAV) -$3.32
PEmg 20.18
Current Ratio 2.21
PB Ratio 4.71

Key Data:

Balance Sheet - 6/30/2013

Current Assets $13,983,000,000
Current Liabilities $6,335,000,000
Total Debt $4,884,000,000
Total Assets $34,130,000,000
Intangible Assets $9,017,000,000
Total Liabilities $16,254,000,000
Outstanding Shares 683,470,000

Earnings Per Share - Diluted

2013 (estimate) $6.53
2012 $6.32
2011 $5.96
2010 $5.63
2009 $4.52
2008 $4.89
2007 $5.60
2006 $5.06
2005 $4.03
2004 $3.56
2003 $3.02
2002 $2.50
2001 $1.79
2000 $2.32
1999 $2.17

Earnings Per Share - Modern Graham

2013 (estimate) $6.11
2012 $5.75
2011 $5.42
2010 $5.14
2009 $4.87
2008 $4.91

Conclusion:

3M appears to possibly be suitable for an enterprising investor, and it would be worth it for a potential investor to do more research. The company has strong financials, stable earnings, and a long dividend history. However, the company may be overvalued by the market at this time. The market is implying a growth rate of nearly 6%, but a more pragmatic estimate based on the company's performance over the last ten years would be around 4%.

What are your thoughts on 3M? Do you think it can achieve a growth rate of 6% or more, as Mr. Market seems to believe?

Source: ModernGraham Valuation Of 3M