Overreaction to 3M Profit Guidance Presents Opportunity

Includes: COGT-OLD, MMM
by: YCharts

It’s a good thing 3M (NYSE:MMM) has 55,000 different products. In a lousy economy, a company needs to spread its risk. Once known as Minnesota Mining and Manufacturing, 3M makes products as varied as Post-it Notes, stethoscopes, touch-screen displays and security devices.

But when 3M said last week [see earnings transcript] that it was bringing down the top end of its profit target, investors bailed from the stock, sending the shares down 7 percent over two days. That sell-off was extreme and the stock looks undervalued, creating a buying opportunity, according to YCharts' proprietary valuation system.

Led by CEO George Buckley, a Brit with a Ph.D. in engineering, 3M is an economic bellwether because of its relationship to so many industries. As Americans felt the pain of recession, so did 3M. Its stock bottomed around $42 a share in March 2009. But 3M shares staged an impressive comeback since, more than doubling to $90.90 just last week before the sell-off.

While revenue dipped in 2009, sales are robust this year. The company increased sales more than 17 percent to $20 billion through the first nine months of this year. Net income is $3.16 billion vs. $2.26 billion for the first nine months of 2009. Profit margins exceeded 20 percent in all six of the company’s business units, 3M says.

Buckley rattled investors by saying margins may be hit by higher costs for materials and by the need to fund pensions. A look at the last five years shows 3M has been able to keep costs in check even as revenue sometimes lagged.

Investors can count on 3M to use its cash to pay dividends. In fact, 3M raised its quarterly dividend every year for the past 52 years.

The company also uses its cash to do acquisitions. It spent $30 million through the first six months of this year completing transactions. But it has a more substantial deal cooking, the proposed $943 million takeover of fingerprint-security firm Cogent Inc. (COGT-OLD). Cogent comes with its own cash hoard of $430 million, making the deal cheaper than the stated price, 3M says.

3M is generating a pile of cash itself. The company had almost $4.5 billion in cash and $1.4 billion in marketable securities at the end of September. That’s up from $3 billion in cash and $1.9 billion in investments it can sell at the end of June.

And those margins? Overall, they’re down significantly from 2007 but rising.

Disclosure: none