Is 3M Still a Gem?

With shares of 3M Company (NYSE:MMM) trading at around $106.07, is MMM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Is 3M losing its edge? While this is a possibility, 3M has a lot going for it at the moment. Positives include low-cost manufacturing, growth through acquisitions, a $7.5 billion buyback plan that will go into effect within the next few months, a recent dividend increase, fair valuation, strong margins, and good cash flow. Another potential positive is a continued interest in acquisitions through 2013. Of course, this comes at a cost, but 3M can afford it. By adding to its already 50,000 products, 3M will further diversify its portfolio and increase potential revenue streams.

As far as negatives go, there has been a lack of innovation recently. However, every well-run company has its peaks and valleys when it comes to innovation. With over 87,000 employees, there is little doubt that 3M will impress in this area in the future. Someone is bound to conjure up a quality concept. One definite negative is Europe, but this is a negative for most companies in any industry at the moment. Luckily, 3M is seeing enough strength in the United States to compensate for Europe. Asia is a mixed bag.

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The chart below compares fundamentals for 3M, General Electric, and Johnson & Johnson (NYSE:JNJ). These three companies differ in many areas, one of them being size. 3M has a market cap of $73.12 billion, General Electric has a market cap of $240.62 billion, and Johnson & Johnson has a market cap of $225.64 billion.

MMM

GE

JNJ

Trailing   P/E

16.79

17.91

20.91

Forward   P/E

14..19%

12.51%

14.01%

Profit   Margin

14.86%

9.29%

16.15%

ROE

26.61%

12.09%

17.25%

Operating   Cash Flow

 $5.30 Billion

$31.33 Billion

$15.40 Billion

Dividend   Yield

2.40%

3.30%

3.10%

Short   Position

1.50

N/A

3.80

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for 3M is considerably stronger than the industry average of 1.10. GE might be more impressive in many areas, but 3M is clearly more impressive when it comes to debt management.

Debt-To-Equity

Cash

Long-Term Debt

MMM

0.34

$4.53 Billion

$6.07 Billion

GE

3.22

$77.36 Billion

$414.06 Billion

JNJ

0.25

$21.09 Billion

$16.16 Billion

 

T = Technicals on the Stock Chart Are Strong

3M has performed well over the past three years. However, it has slightly underperformed GE over that time frame – and GE offers a higher yield of 3.30 percent.

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1 Month

Year-To-Date

1 Year

3 Year

MMM

3.65%

14.93%

22.14%

41.44%

GE

0.39%

12.06%

23.40%

53.61%

JNJ

6.72%

16.24%

28.53%

39.76%

 

At $106.07, 3M is trading above all its averages.

50-Day   SMA

102.54

100-Day   SMA

96.98

200-Day   SMA

93.92

 

E = Earnings Have Been Steady            

Revenue has improved over the past three years, but the pace of growth has slowed. That said, healthy conglomerates tend to see small to moderate fluctuations in revenue. In these cases, the bottom line is more important. Earnings have consistently improved since 2009, which is an excellent sign.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

25.27

23.12

26.66

29.61

29.90

Diluted   EPS ($)

4.89

4.52

5.63

5.96

6.32

 

When we look at the last quarter on a year-over-year basis, we see mild improvements in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

7.09

7.49

7.53

7.50

7.39

Diluted   EPS ($)

1.35

1.59

1.66

1.65

1.42

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

Conglomerates are involved in so many industries that a trend will always support an industry somewhere. However, it works the other way as well. One poorly performing industry can drag on results. In these situations, cutting costs or even a divestment are options. The real threat is if the global economy falls into recession. When this happens, all industries struggle.

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Conclusion

3M has consistent top-line and bottom-line growth, solid margins, superb diversification, a good yield, and excellent historical stock performance. 3M is an OUTPERFORM.

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