- 3M’s operating segments shed light on important growth drivers.
- My assumptions in the Levered Returns models yield a fair value per share of $121, well below its July 30th closing price of $143.74.
- Currently trading at a premium to Honeywell on a P/E multiple basis.
3M (NYSE:MMM) is a diversified technology company with a global presence in several businesses. 3M's six business segments bring together common or related 3M technologies, enhancing the development of products and services and provide sharing of business resources. Understanding 3M's operating segments sheds light on the company's important growth drivers. Thus, I've built a revenue forecast on an operating segment basis for the company:
The company's operating segments are as follows:
- Industrial segment (34% of Sales) serves a broad range of markets with its major products that include tapes, coated, nonwoven and bonded abrasives, adhesives, advanced ceramics, and sealants.
- Safety and Graphics segment (18% or Sales) offers personal protection products, traffic safety and security products, commercial graphics systems, commercial cleaning and protection products, floor matting, and roofing granules for asphalt shingles.
- Electronics and Energy segment (18% of Sales) offers optical films solutions for electronic displays, packaging and interconnection devices, insulating and splicing solutions for the electronics, telecommunications and electrical industries, touch screens and touch monitors, renewable energy component solutions, and infrastructure protection products.
- Health Care segment (17% of Sales) provides medical and surgical supplies, skin health and infection prevention products, drug delivery systems, dental and orthodontic products, health information systems and food safety products.
- Consumer segment (14% of Sales) offers sponges, scouring pads, high-performance cloths, consumer and office tapes, repositionable notes, indexing systems, construction and home improvement products, home care products, protective material products, and consumer and office tapes and adhesives.
- Corporate segment (-2% of Sales) includes a variety of miscellaneous items, such as corporate investment gains and losses, certain litigation and environmental expenses, corporate restructuring charges and certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the company may choose not to allocate directly to its business segments.
DCF Valuation Model
These revenue and profitability growth drivers are reflected below in the Levered Returns discounted cash flow analysis model to determine an Enterprise Value. I then deduct net debt, after-tax underfunded pension obligations and add long-term investments to conclude the total equity value and resulting per share value for the company:
Other Key Assumptions
Capital Expenditures: 3M has historically spent between 3.9% and 5.8% of sales on capital expenditures. I've selected 5.0% which is consistent with the 10-year average capital-expenditures as a percent of sales.
Working Capital: I've selected 15.6% which equals the average net working capital dollar amounts over the last four quarters as a percentage of sales.
Discount Rate: To estimate the discount rate for 3M, I used the Levered Returns discount rate model which you can assess below:
As the DCF analysis implies, 3M from a valuation perspective looks overvalued with a fair market value price target of $121. The company is currently trading at a LTM and forward P/E multiple of 20.3x and 19.3x, respectively. Both data points are steep premiums to industrial conglomerate Honeywell (NYSE:HON) which currently trades at 18.5x LTM earnings and 16.9x forward earnings. I recommend value investors stay clear of 3M until its share price drops to a more reasonable level.