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As a first step with analyzing any company, I always start with the financial statements.

By going through a list of checkpoints, it's easy to get a good ideas of how the company stands. In the checklist you see today, I will go through the financial statements.

You don't need to have a finance degree to be able to find the numbers and stats I will list below for each checkpoint.

This exercise will attempt to answer what investment grade 3M (NYSE:MMM) receives as an investment opportunity.

Here is the full and complete 12 page PDF stock valuation report, taken from the OSV stock valuation and analysis spreadsheets so that you can see how I came up with all these scoring points.

Based on the information from the valuation report, here are my grades for 3M.

3M Financial Score

  • Income Statement Score: A
  • Balance Sheet Score: D
  • Cash Flow Statement Score: C
  • Overall score: C

Continue reading to see how each score was tallied.

Income Statement Checklist (Max 10 Pts)

  • Margins analysis: 1 pt

3M receives 1 point for margins because the company is a solid bellwether. Able to maintain gross margins of 47% and net margin in the mid teens.

  • SG&A Percentage: 2 pts

3M receives 2 points because SG&A is stable and below 30%. Any company that increases SG&A should be looked into to see whether money is being spent properly.

SG&A as a percentage of revenue should also be less than 30%.

  • R&D Percentage: 2 pts

Earns 2 points because R&D is lower than the competition and also at a consistent each year. High R&D expense is an indication that the business does not have a competitive advantage and/or the industry is very competitive.

  • Interest Income: 1 pt

While there is interest income, it is less than 0.5% of revenue. Not a cause of concern.

  • Extraordinary Income: 1 pt

3M does not have any special income. If this item shows up regularly, it should be a warning sign.

  • Net Income: 2 pts

2 points are awarded because net income is consistent as a percentage and is also higher than its competitors.

  • Diluted Shares: 0 pt

If 3M consistently reduced its share count or when prices were low. While the share count has come down over the past few years, it is still at the same level as 2008-2009.

  • Income Statement Score: 9/10 = 90% Grade = A

Next is the balance sheet.

Balance Sheet Checklist (Max 16 Pts)

  • Cash & Equivalents: 1 pt

3M is a huge company. While cash and equivalents is only 7% of total assets, the absolute value is $5 billion which is a huge cash balance.

  • Net Receivables Growth: 1 pt

3M's net receivables growth is consistent with sales growth.

If the company shows a higher growth of net receivables than sales, it is a sign of loose credit to customers and should be investigated.

  • Inventory Growth and Trends: 1 pt

Inventory growth does not overly exceed sales growth. This is a sign that inventory is well managed and management has a good handle on sales expectations.

  • Fixed Assets: 1 pt out of 2pt

Fixed assets as a percentage of total assets is average. 3M does not need to over invest in fixed assets to do business.

  • Goodwill: 0 pt

Goodwill is 22% of total assets which is below my requirement of 10%.

Although 3M could receive an exception because it has such strong brands in its portfolio of products.

  • Intangibles: 1 pt

1 point for having intangibles less than 35%.

  • Accounts and Taxes Payable: 1pt

There is no set rule for this, as long as it is consistent which 3M is.

  • Short Term Debt: 1 pt out of 2 pts

There is a little amount of short term debt, but as a percentage of total assets, it is below the returns that the company generates and can be paid back easily.

  • Long Term Debt: 1 pt out of 2 pts

This is the same as short term debt.

  • Current Liabilities: 1 pt

Compared to competitors, 3M is at a standard level. They also have the capability to easily pay it off and receives a point.

  • Minority Interest: 0 pt

The level of minority interest on the balance sheet isn't something to be worried about. If this was a red flag item, it would receive a -1 point.

  • Total Liabilities: 0 pt

Total liabilities is less than 25% of total liabilities and equity and receives one point.

  • Tangible Shareholders Equity: 1 pt out of 2 pts

If tangible shareholders equity had increased for 10 years, 2 points is given, but for 3M, it receives only 1 point as there is consistency.

  • Balance Sheet Score: 10/16 = 63% Grade = D

Finally the cash flow statement.

Cash Flow Statement Checklist (Max 11Pts)

  • Other Income: 1 pt

It is pretty clear where income is coming from and there are no big numbers from the other non cash items to be worried about.

  • Acquisitions: 0 pts

3M operates in 6 different segments and has all sorts of products, brands and services. They need to continue acquiring companies to continue their growth.

There is a limit to how much organic growth 3M can achieve so it receives 0 points here.

Just remember that a company that makes regular acquisitions may have high growth, but growth is not organic and can not always last. Serial acquirers always end up in bad situations.

  • CapEx Levels: 0 pts

A company with durable competitive advantage uses a smaller portion of earnings for capital expenditure for continuing operations than those without.

3M can clearly afford its current capex levels, but capex is increasing over several years and receives a 0 here.

  • Issuance of Stock: 0 pts

If a company issues stocks consistently, it gets a -1, but since 3M's net issuance of stock is negative, meaning it buys back more than it issues, no marks are deducted.

  • Repurchase of Stock: 0pts

Although 3M buys backs its stock, it gets 0 points because 3M also buys back stock when their share price is high. The repurchasing and purchasing at any time, cancel out any positive points.

  • Issuance of Debt: 0 pts

While old debt is retired and either refinanced or new ones issued, the past 3 years has seen a negative net issuance of debt. Maintaining the level gets a 0.

  • Repayment of Debt: 1 pt

With plenty of excess cash in its bank, 3M is able to pay back debt through FCF.

  • Dividends Paid: 1 pt

With a yield of 2.6%, a point is awarded.

  • Cash from Financing: 1 pt

The company cash source does not come from financing which receives 1 point.

  • Free Cash Flow: 2 pts

FCF has been positive for over 10 years, with steady growth.

  • Owner Earnings: 2 pts

One of the things to watch is whether FCF and Owner earnings closely match each other. If so, it means that the business does not require a lot of working capital since owner earnings is FCF excluding working capital.

3M's FCF and owner earnings are fairly consistent with each other and therefore gets 2 points.

Cash Flow Statement Score: 8/11 = 73% Grade = C

3M Financial Score

  • Income Statement Score: A
  • Balance Sheet Score: D
  • Cash Flow Statement Score: C

Overall score: C

Not a bad company. Better investment opportunities out there but is worth keeping an eye on.

Source: 3M Is A C-Grade Stock