The 3M Company (NYSE:MMM) is a favorite stock of Jean-Marie Eveillard’s First Eagle Investment Management, Boykin Curry’s Eagle Capital Management and Ric Dillon’s Diamond Hill Capital. It recently reported third quarter earnings below analysts estimates. Consensus estimates were EPS of $1.61 on sales of $7.8 billion. 3M reported EPS of $1.52 on sales of $7.5 billion. MMM currently trades below $79 and analysts’ 12-month price target for the stock is more than $90, but that doesn’t necessarily mean it is a good deal to buy MMM now.
First, we will look at the P/E ratio. This metric divides a company’s share price by its earnings per share – the lower the number, the better. P/E ratio indicates how many times its earnings a company is trading at. If the P/E ratio is high, the stock could be overpriced, so the lower the better. Of the companies we looked at, AVY has the lowest P/E ratio at 10.08, followed by DD at 13.22, MMM at 13.49 and JNJ at 15.64.
We used beta as a measure of risk. A beta of 1.0 means that the stock moves with the market. The higher a stock’s beta, generally, the more volatile the stock, and, as a result, the more risky. A lower beta tends to indicate that the stock moves more independently from the market. JNJ has the lowest beta of the companies we looked at. It has a beta of just 0.55. MMM is next at 0.87, followed by AVY at 1.40 and DD at 1.46.
Next, let’s look at the earnings growth consistency and expectations. Expected growth estimates can be wrong. In fact, they are frequently overstated, but they can be useful when comparing companies or comparing a company’s performance relative to its industry. MMM’s earnings grew 6.6% over the last five years, compared to its industry’s earnings growth of 7.1%. Analysts predict the company’s earnings will grow by 12.3% over the next five years, compared to industry earnings forecast of 16.8%.
In comparison, DD’s earnings grew by just 5.3% over the last five years and are forecasted to grow by 8.8% over the next five years. JNJ’s earnings grew 6.6% over the last five years. They are expected to grow 6.0% in the next five years. AVY’s earnings shrank 1.3% over the last five years. They are expected to grow 7% over the next five years. MMM has the strongest forecasted growth and was tied with JNJ for the greatest growth over the last five years.
Hedge Fund Ownership
Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on the average. Each of the funds we looked at has a fair amount of hedge fund ownership. JNJ was the most popular of the stocks we looked at. Of the 300+ hedge funds we track, 57 had positions in the company at the end of the second quarter. DD was next at 31, followed by MMM at 29 and AVY at 15.
Dividends serve a couple of purposes. Obviously, they reward investors for their investments and, to an extent, can be used to attract long term investors. Whether or not a company offers dividends can also convey something about the quality of the company’s earnings. AVY offers the highest dividend yield of the companies we looked at, offering 3.76%. JNJ was next at 3.56%, followed by DD at 3.37% and lastly MMM at 2.77%.
The Bottom Line
MMM isn’t exceptionally cheap but we rate it as a buy because of its low risk profile and higher expected growth rates. JNJ is also a solid conservative investment with a lower risk profile. We think DD is slightly overpriced compared to MMM. Companies with a similar profile include Reed Elsevier Plc (RUK), with a 17.54 P/E ratio and a 3.82% dividend yield, or the Toronto-Dominion Bank (NYSE:TD), with a 12.29 P/E ratio and a 3.63% dividend yield. We also like MMM because it has been increasing its dividends consistently. Its dividend yield isn’t very high but it increases at a higher rate than inflation. This makes MMM as a strong alternative to 10 year treasuries.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.