Weekly Stock Call

June 29, 2010
Current Price – US$78.49


While 3M Company is not presently trading at low enough price levels to be considered a classic value investment, the company is trading at a modest discount and I feel that it presents as a good investment candidate for the times. With a strong balance sheet (Interest Coverage: 30.3, TD/Equity: 42.6%), generous free cash flow (FCF/Sales: 17.5%) and high margins (Operating: 22.8%, Net Profit: 15.0%), 3M is well positioned to expand revenues in coming years through innovative new product introductions, aggressive marketing to capture market share from weakened competitors and ongoing strategic acquisitions. Further, the company has a long, stable record of paying out a growing dividend (Yield: 2.68%). 

3M is a diversified global manufacturer and marketer of a wide variety of products operating in six primary business segments: Industrial and Transportation (31% of Sales); Health Care (18%); Consumer and Office (15%); Safety, Security and Protection Services (13%); Display and Graphics (13%); and Electro and Communications (10%). The company, known for major brands such as:  Nexcare, Post-it, Scotch, Ace, Thinsulate and Filtrete, operates 177 manufacturing plants, employs 75,000 people globally and has annual revenues of US$23B. 


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount model and, historical and industry price ratios) I arrive at a current valuation for 3M Company of US$87.39.

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield        11.3%
Dividend yield    2.8%
Total return      14.1%


Risks

Global Economic Conditions – Operating in 65 countries with a widely diversified product portfolio, 3M has broad exposure to negative general economic conditions, particularly as in the presently subdued end-market sectors such as automotive, housing and commercial real estate.

Currency Risk – With 63% of revenues generated outside the United States, reported revenues are at risk with strengthening of the U.S dollar.

New Product Introductions – Lack of market acceptance or adoption is always a risk given 3M’s reliance on innovation as a growth driver.

Acquisitions – Failure to effectively integrate acquired companies or realize anticipated synergies.

Legal and Regulatory – While 3M makes provision for known or anticipated liabilities, the potential for unexpected, unmitigated, material future liabilities exists.


The Numbers

Share Price ($US)     78.49 
Market Cap ($US B)  56 
No. Shares (M)         713 
ROE                         28.3%
ROA                         13.9%
P/E Ratio                  15.6 
Price/Sales Ratio        2.2 
Price/Book                 4.5 
Current Ratio             2.4 
Interest Coverage     30.3 
Total Debt/Equity       0.43


Analyst: David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.






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