MMM Looks Cheap

This week it was announced that MMM’s fourth-quarter sales beat analyst expectations, but profits did not, and guidance for 2007 was below expectations. The stock fell from the 80 area back into the mid-70s. This world-class blue chip growth stock has now become cheap enough to be considered by value investors. If MMM should become available for less than $70 a share, I think it would be offering extremely attractive total return potential.

MMM and its brand name are synonymous with high-quality American consumer goods. The company has achieved success by applying leading-edge technology to the development of innovative new products, such as Scotch tape and Post-it notes, which have become international blockbusters. Over time, the reach of MMM’s products has extended into more arcane areas such as electronics, health care, and security.

But in recent years the flow of new blockbusters has dried up, generic substitutes for MMM products have proliferated, and the stock has been a disappointing performer. It has been stuck in a trading range between 66 and 82 for three years now. There is a perception on Wall St. that MMM’s growth is slowing. The shares’ P/E ratio has contracted from 29 in 2002 to the present reading of 16.2.

But I think sentiment has become too pessimistic. New blockbuster products are possible at any time: MMM has an army of research scientists who generate many new patents every year. Furthermore, some two-thirds of MMM’s sales now occur outside the U.S. The company has 10 plants open or under construction in China, and they are also constructing plants in Russia, Poland and India. MMM therefore has great potential for participation in the growth of emerging markets, and the shares have value as a hedge against U.S. dollar weakness.

Surprisingly, this stock also exhibits a very low 1 and 3-year correlation to most market sectors, and it actually has a strong negative correlation to health care, energy, and utilities, so owning MMM could help dampen portfolio volatility. And if 3M should return to favor on Wall St., even a modestly higher P/E ratio of 20 would imply a share price of 92 based on the low end of the company’s expectations for 2007 earnings.

Description of business from the company’s website: “3M is a $21 billion diversified technology company with leading positions in consumer and office; display and graphics; electronics and telecommunications; health care; industrial and transportation; safety, security and protection services and other businesses.

Headquartered in St. Paul, Minnesota, the company has companies in more than 60 countries and serves customers in nearly 200 countries. 3M is one of the 30 stocks that make up the Dow Jones Industrial Average and also is a component of the Standard & Poor’s 500 Index.”

Is the size of firm over 1 billion market capitalization? Yes, 55B.

Price to earnings analysis: is the current P/E ratio below 20? Yes, 16.2.

Has the stock’s performance equaled or exceeded the performance of the S&P? Not quite.

Volatility: Is the stock’s beta less than or equal to 1.00? Yes, .89.

Price to assets analysis: is the P/B ratio below 2.5? No: 5.3

Price to cash flow analysis: is the current P/CF ratio below 20? Yes, 12.9.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes, 2.46 vs. 2.13.

Dividend growth - does the five year dividend growth rate exceed the S&P’s dividend growth rate? Yes. five year dividend growth rate is 7.7%.

Dividend payout analysis: Is the payout ratio less than 50%? Yes, 38.9%.

Current ratio analysis: Is the current ratio greater than 2.0? No: 1.21.

Debt to equity ratio analysis: Is the total debt to equity ratio less than 1.0? Yes, 0.11.

Interest coverage analysis: Does the interest coverage ratio exceed 3.0? Yes, 70.8.

Earnings stability - has there been positive net income for each of the prior ten years? Yes.

Earnings growth - is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes, more than double.

Is the business simple and understandable? Yes. 3M is best known for Scotch tape, Post-it notes, Scotchgard fabric protectors, and Scotch-Brite cleaning products. Sales outside the US account for two-thirds of 3M’s sales.

Does the business have favorable long term prospects? Yes, as long as MMM keeps its edge in the development of new products.

Are company insiders buying more stock than they are selling? No.

Does the expected annual total return exceed 10%? Yes, perhaps as much as 13.5%.

Does technical analysis reveal a convincing uptrend? No. For the last three years, MMM has been moving sideways in an erratic and unpredictable trading range between 66 and 86.

MMM 1-yr. chart:

Related Articles: The Long Case for 3M; Falling Dollar: Who Stands To Gain?; 3M's Tumble Makes it a Buy (MMM)

Comments

[7c-ranch]

Your analysis is welcome. I have been in and out of this stock several times for very small returns. Are you sure this is not a value trap?