Can Old School 3M Pull Off An Upset Against UnitedHealth?

| About: 3M Company (MMM)

Summary

UnitedHealth is up 47.4% excluding dividends in the past year (up 49.1% including dividends).

3M is up 26.3% excluding dividends (up 28.9% including dividends).

UnitedHealth has been a high flyer in 2016 but 3M looks to best the insurer.

In the divisional round of the Dow Industrials Playoffs we have # 7 seeded 3M Company (NYSE:MMM) taking on # 2 seeded UnitedHealth Group Incorporated (NYSE:UNH). 3M is a consumer products innovation company while UnitedHealth provides health care coverage, software and data consultancy services.

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)

UNH

18Oct16

2.17

2.08

46.29

46.09

MMM

25Oct16

2.15

2.14

7.71

N/A

UnitedHealth is up 47.4% excluding dividends in the past year (up 49.1% including dividends) while 3M is up 26.3% excluding dividends (up 28.9% including dividends), and the S&P 500 has gained 18.1% 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 which will proceed to the conference finals where they will face IBM (NYSE:IBM).

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 20.57 which is fairly priced for the future right now while UnitedHealth's 1-year forward-looking P/E ratio of 17.07 is also fairly priced. Game 1 goes to UnitedHealth by virtue of having the lower value.

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 3.88 based on a 1-yr earnings growth of 5.76% while UnitedHealth's 1-yr PEG ratio is 1.29 based on a 1-yr earnings growth rate of 18.63%. UnitedHealth takes Game Two to take a two game lead.

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 UnitedHealth sports a growth rate of 18.63%. UnitedHealth puts a knockout punch to 3M in Game Three and is just one game closer to clinching the series.

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 2.5% with a payout ratio of 56% of trailing 12-month earnings while UnitedHealth pays a dividend of 1.54% with a payout ratio of 37% of trailing 12-month earnings. 3M wins Game Four of the series and stops UnitedHealth from advancing 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 UnitedHealth is showing 5.5% efficiency. With this victory 3M is feeling some adrenaline flowing through their veins now after stopping UnitedHealth twice in its tracks.

Return on Equity

Return on equity is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. It is best to compare ROE 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. Equity is determined as the net income for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better. 3M proves its efficiency of managing its shareholders' equity to be 41.7% while UnitedHealth sports a value of 18.3%. By winning this game, 3M defeats UnitedHealth and evens the series at three games.

Return on Investment

ROI is an important financial metric because it evaluates the efficiency of an investment that a company makes and if an investment doesn't have a positive ROI, then the investment should not be made. It is calculated by dividing the difference of cost of investment from gain from investment by cost of investment. It is best to compare ROI 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 higher the ROI value the better. 3M came out swinging in the decisive game with an ROI of 22% while UnitedHealth was able to only hit a value of 10.1%. With this victory 3M pulls off the upset and advances to the next round to play IBM.

Conclusion

This seemed like a matchup that UnitedHealth should have won but I guess 3M had something to prove. Thought UnitedHealth provides insurance it behaves a lot like a financial company and I believe those types of stocks are coming out of favor right now. 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 IBM in a matchup of old school names that have been in the index since the 70's.

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 opinion s 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.

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