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Here is a look at how 3M (NYSE:MMM) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  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 or be suitable for a defensive investor: 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 – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $100.49
MG Opinion Overvalued
Value Based on 3% Growth $89.26
Value Based on 0% Growth $52.33
Market Implied Growth Rate 6.90%
Net Current Asset Value (NCAV) -$3.75
PEmg 22.31
Current Ratio 1.79
PB Ratio 5.19

Balance Sheet – 9/30/2013

Current Assets $13,282,000,000
Current Liabilities $7,439,000,000
Total Debt $3,533,000,000
Total Assets $33,604,000,000
Intangible Assets $9,087,000,000
Total Liabilities $15,808,000,000
Outstanding Shares 673,270,000

Earnings Per Share

2013 (estimate) $6.68
2012 $6.32
2011 $5.96
2010 $5.63
2009 $4.52
2008 $4.89
2007 $5.60
2006 $5.06
2005 $4.16
2004 $3.75
2003 $3.02
2002 $2.5

Earnings Per Share – ModernGraham

2013 (estimate) $6.16
2012 $5.75
2011 $5.42
2010 $5.14
2009 $4.88
2008 $4.94

Conclusion:

When we last looked at 3M (view our last valuation here), it was rated as suitable for the Enterprising Investor and overvalued. This time, the result is no different; though the valuation itself has increased, the market has also increased its price level. The Defensive Investor remains turned off by the current ratio and the high PEmg and PB ratios. As a result, Enterprising Investors should feel comfortable keeping 3M on a watch list to see if the price lowers to a place that is closer to the intrinsic value. In addition, Enterprising Investors may wish to do further research into some other companies, such as by reviewing the ModernGraham Valuation of Honeywell International (NYSE:HON) and the ModernGraham valuation of Hewlett-Packard Company (NYSE:HPQ). As for the valuation, the company has grown EPSmg (normalized earnings) from $4.88 in 2009 to an estimated $6.16 for 2013. This level of growth is impressive, but does not support the market’s implied estimate of 6.9%. As a result, the company appears to be overvalued presently.

Disclaimer: The author did not hold a position in 3M Company (MMM) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Valuation Of 3M Company