3M: A Solid Long-Term Play With Short-Term Woes

 |  About: 3M Company (MMM)
by: Blake Ruddock


Despite 3M's (NYSE:MMM) solid fundamentals, I recommend that investors hold off on buying this dividend-yielder until global macro concerns beat the stock down to $81-$84 per share. At this price, I believe the stock would offer at least a 20% upside in the next 18-24 months, along with an attractive return to the 20-year historical performance trend of 8.5% per annum.

Macro Considerations

In terms of value and performance, there is no doubt that 3M is a compelling long-term investment opportunity. As growing sectors like renewable energy and filtration products quickly become core operating areas for the company, 3M products will be well positioned to continue gaining market share over time. Additionally, with products sold in over 200 countries, 3M is well-diversified in global terms, and therefore is less threatened by isolated economic turmoil than the average multinational conglomerate. Despite this, the stock will still likely face challenges as regulators continue working to find a solution to the ongoing European economic crisis. To add to the uncertainty, 3M, like any another multinational producer, is threatened by political and social turmoil; therefore, as we move into a period of growing economic and political uncertainty, it will be challenging to predict the performance of the stock. Considering all of this, MMM might be worth adding to your watch list, but it will almost certainly face unpredictable price volatility in the short-term.

Quantitative Perspective

At the quantitative level, 3M is not the most exciting trade opportunity, but it does offer an attractive, consistent pattern of long term growth. In the past twenty years, it has boasted a strong average rate of return of 8.5% per annum as compared to the S&P 500, which returned an average 6.3% per annum. Additionally, the stock pays a reliable and consistent quarterly dividend, equivalent to about 2.6% annually. With 5-year treasury notes offering yields of .62%, long-term income investors might find this issue attractive.

Although the stock took a beating with the market collapse of 2008 and 2009, it has quickly rebounded towards the historical trend. Given that trend, I think it is fair to say that the stock will surpass $100 per share with little difficulty in the next 18-24 months. However, short-term macro concerns will likely delay this from occurring in the next year. Thus, for an investor looking to build a position in this Dow Jones constituent, it may be wise to wait for a partial (38.2% to 50%) retracement of the recent bullish trend (October 2011 - Present), which would discount the stock to about $81-$84, or about 10-12% less than its current price (retracement shown in chart below).

(click to enlarge)Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.