I looked at 3M (MMM) at the beginning of the month and wrote my first article on my observations of the company May 2nd, at which point I mentioned it looked like the company was consolidating and would move sideways for a period of time before it moves up. If you have followed any of my articles, I am always looking for opportunity to make money whether it be long or short term.
My last play with 3M was a Bear Put spread as the company was trading at the top of its resistance level at the time and I believed it would come down. At the beginning of May, it was trading at around $89.3 and my play was to buy a July 2012 '87.50' put and then sell an '85' put with the same strike price. The stock is currently trading at $84.56. Reversing the trade, I made a $46 profit per trade. Soon I would expect the stock to move up and bounce off its lower support.
I was bullish long term on the stock when I first wrote and I am still looking at it the same way. 3M is working on becoming more profitable by streamlining how it does business to cut costs. 3M is in the process of untangling one of the world's most complex manufacturing enterprises. With the economy so fragile it is hard to get consumers to part with their money and 3M barely edged higher at 2.4% increase. It needs to get its complex manufacturing process in order.
With a complex supply chain and producing some-65,000 items, it is a daunting task. 3M's long-term plan is to have fewer, larger, more efficient plants, and spread them out around the world. More production will be done in what 3M calls "super hubs," plants capable of making scores of products for a region of the world. Its goal is to reduce cycle times - the period needed to go from ordering raw materials to delivering finished goods - by 25%. This is a large amount of time and resources to free up that could have a huge impact on the stock in the future.
Dividend Monk at Seeking Alpha wrote an article and described how the company has a strong balance sheet. He writes:
Overall, 3M also offers one of the strongest balance sheets with total debt/equity under 30%, and an interest coverage ratio of over 30.
I believe this reinforces how strong the company is now and with cost-cutting ventures ahead, I believe it will be in strong financial shape even if sales slow for awhile. Considering it is at the bottom of its trading range, I would look at a Bull Call Spread to make money on the stock short term.
(click to enlarge)
The Options Play
The stock is currently trading at $84.56
- Buy a July 2012 call with a strike of '85' (priced at $2.90)
- Sell a July 2012 call with a strike of '87.5' (priced at $1.65)
- Net Debit to Start: $1.35
- Maximum Profit: $1.15
Reasoning behind the Trade
3M is in a trade zone and I am expecting it to reverse direction and go up soon.
