3M And United Technologies Battle For Industrial Supremacy

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Includes: MMM, UTX
by: Abba's Aces

Summary

United Technologies is up 16.8% excluding dividends in the past year (up 19.4% including dividends).

3M is up 21.4% excluding dividends (up 24% including dividends).

Who will be the eventual winner between these two industrial powerhouses?

In the first round of the Dow Industrials Playoffs we have #10 seeded United Technologies Corporation (NYSE:UTX) taking on #7 seeded 3M Company (NYSE:MMM). United Technologies engages in the provision of products and services to the building systems and aerospace industries worldwide while 3M is a consumer products innovation company.

The following table depicts the recent earnings reports for each company:

Ticker

Earnings

Date

Actual EPS

($/share)

Estimated EPS

($/share)

Actual Revenue

($ in billions)

Estimated Revenue

($ in billions)

UTX

25Oct16

1.76

1.66

14.35

14.27

MMM

25Oct16

2.15

2.14

7.71

N/A

United Technologies is up 16.8% excluding dividends in the past year (up 19.4% including dividends) while 3M is up 21.4% excluding dividends (up 24% including dividends), and the S&P 500 has gained 12.5% in the same time frame. This matchup will be played out in a best of seven game series based on the metrics below. For a complete list of all the metrics utilized in the seven game series click here. Not all the metrics will be looked at if a team can win and win early. This matchup will determine the winner of the first wild card game which will proceed to play the # 2 team, United Health (NYSE:UNH).

Forward P/E

Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. 3M carries a 1-year forward-looking P/E ratio of 20.67 which is fairly priced for the future right now while United Technologies' 1-year forward-looking P/E ratio of 16.93 is fairly priced. Game 1 goes to United Technologies.

1-yr PEG

This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone. The 1-year PEG ratio for 3M is currently at 3.89 based on a 1-yr earnings growth of 5.76% while United Technologies' 1-yr PEG ratio is not applicable based on a 1-yr earnings growth rate of-0.76%. 3M takes Game Two to even the series.

EPS Growth Next Year

This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above. 3M has a projected EPS growth rate of 5.76% while United Technologies sports a growth rate of-0.76%. 3M puts a knockout punch to United Technologies in Game Three.

Dividend Yield

Dividend yield is a no brainer; it must be had in a portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve month earnings. 3M pays a dividend of 2.49% with a payout ratio of 56% of trailing 12-month earnings while United Technologies pays a dividend of 2.38% with a payout ratio of 58% of trailing 12-month earnings. 3M wins Game Four of the series to move one game closer to the next round.

Return on Assets

Return on assets is the metric which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less assets. 3M is showing a 14.8% efficiency rate on their assets while United Technologies is only showing 8.2% efficiency. With this victory 3M has just advanced to the next round and will face United Healthcare.

Conclusion

Although United Technologies won the first game of the series they were no match for 3M. United Technologies is still a great company for a portfolio. United Technologies may have a mixed outlook going forward because of what President Elect Trump is trying to accomplish and this may keep the stock abated. 3M on the other hand should benefit quite a bit from Trump's lower taxes which should boost the bottom line. I'm excited to see 3M advance to the next round to play United Health.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I/we 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.