Can 3M Continue to Impress Investors?

3M (NYSE:MMM) has become a beacon of American industry in its 111 years of existence. The stock has long been considered a solid “buy and hold” and dividend play for investors. After announcing impressive second quarter earnings on Thursday, the company looks poised for continued earnings and revenue growth. Let’s use our CHEAT SHEET investing framework to decide whether 3M is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

3M announced stellar second quarter results on Thursday. The company reported earnings per share of $1.71 — beating analysts’ estimates of $1.70, and 3 percent higher than the previous year’s quarterly EPS. Additionally, sales rose across the board, with increasing revenue growth in the Health Care, Industrial, Consumer, and Safety and Graphics divisions. However, revenues from the Electronics and Energy division decreased on a year-over-year basis.

Most notable from the report was 3M’s substantial free cash flow of $1.285 billion. The company has a strong return on invested capital at 19.07 percent*, and has used its cash flow to fund several recent acquisitions and internal research and development. The company bought Ceradyne, an industrial ceramics and ballistics armor company, late last year. So far, the acquisition has proven successful: Ceradyne sales grew 4.6 percent year-over-year, adding to 3M’s Industrial division’s 6.6 percent revenue growth for the quarter.

*Statistic sourced from Morningstar

E = Earnings are Increasing Year-over-year

The second quarter of 2013 marks the fifth consecutive quarter of year-over-year earnings per share growth for 3M. The company has always paid special attention to its bottom line, and with a developing international supply chain, ongoing cost-cutting initiatives, and a $4 billion share repurchase program for 2013, earnings per share should continue to grow over the next several quarters.

Revenue growth has increased year-over-year in the last two quarters. One reason for this growth is its international presence — about 65 percent of sales come from overseas. Demand for healthcare and consumer goods products have increased in developing countries as disposable incomes have grown. Additionally, as governments improve their infrastructures, demand perks up for 3M’s products — namely its window film and reflective sheeting used for road signs.

2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2
Qtrly. EPS $1.71 $1.61 $1.41 $1.65 $1.66
EPS Growth YoY 3.01% 1.26% 4.78% 8.55% 3.75%
Qtrly. Revenue $7.634B $7.387B $7.497B 7.534B $7.486B
Revenue Growth YoY 1.98% 4.20% -0.45% -1.90% 2.39%

*Data sourced from YCharts

E = Excellent Performance Relative to Peers?

The industrial conglomerates industry is usually characterized by steady growth and relatively high dividends. Additionally, industrial conglomerates are often used as bellwethers for global economic conditions. 3M stacks up well against two of its biggest competitors: General Electric (NYSE:GE) and Johnson & Johnson (NYSE:JNJ). All three companies are relatively expensive, given that their price to equity ratios are much higher than that of the industry. However, these companies earn this premium because of their ability to rebound from economic downturns, and because of their established dividend history.

3M’s profit margin is second only to Johnson & Johnson’s, mainly because of the differences between some of their business operations. However, the company reaps more profit per sales dollar than the industry, on average. While 3M has a weaker dividend yield than GE and Johnson & Johnson, it is still right in line with that of the industry. The company has not missed a dividend payment in 97 years, and has increased its dividend payment every year since 2003.

MMM JNJ GE Industry
Trailing P/E 18.30 20.46 18.19 13.4
PEG Ratio 1.83 2.70 1.45 N/A
Profit Margin 14.80% 18.38% 9.74% 14.4%
Dividend Yield 2.20% 2.90% 3.20% 2.20%

*Data sourced from Yahoo! Finance

T = Technicals on the Stock Chart are Strong

3M opened Friday’s trading day at a price of $116.55, above both its 200-day moving average of $106.68 and its 50-day moving average of $112.03. The stock has experienced a strong uptrend in the past year — up 27 percent in the last 12 months. A short-term uptrend is evidenced by the stock’s high relative strength index of over 80. While a high RSI usually indicates the stock is overbought, a major pullback is unlikely given the fresh earnings beat. 3M currently trades right around its 52-week high of $117.30.

Conclusion

Given its strong history of successful research and development, as well as its substantial economies of scale in over 200 countries, 3M’s competitive advantage should remain in tact over the long term. The company reported strong second quarter earnings, underscored by a continued ability to generate significant free cash flow. Moreover, the company is actively returning its cash balance to investors, in the form of share repurchases and dividend increases. Its investment in emerging markets is paying off, as healthcare and infrastructure spending in Latin America and Asia continue to grow. While the company is expensive relative to its historical price to earnings multiples, it is not likely to grow cheaper in the near-term, given its strong second quarter. Still, 3M’s steady earnings and dividend growth make it a long-term buy. 3M is an OUTPERFORM.

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