What Makes 3M Special?

With shares of 3M Company (NYSE:MMM) trading at around $110.61, 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

The question in the title can be answered in one word: innovation. 3M is one of the most innovative companies on the planet, and that has been the case for a long time. For example, when Neil Armstrong took that one small step for man, the rubber sole on his boot was made by 3M. Therefore, it can be said that 3M was the first company to walk on the moon.

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Since that time, 3M has only increased its innovation. Most readers, if not all readers, will be familiar with at least one of their brands. These brands include Ace, Common, Filtrete, Futuro, Nexcare, Post-It, Scotch, Scotch-Brite, ScotchBlue, Scotchgard, and Tegaderm. 3M has also recently developed Scotch Recycled Corrugate Tape 3072, which is industrial tape that can be used for packaging corrugated boxes.

Sticking with the innovation theme, 3M has consistently delivered over the past several years. For instance, when the Chilean miners were trapped in 2010, a 3M mobile projector was used to help. Another example of impressive innovation by 3M allows an astronaut’s heartbeat to be heard from earth. Also thanks to 3M, someone can receive a medical diagnosis from anywhere (opposed to a doctor’s office) with a Littmann Stethoscope.

The ultimate point here is that consistent innovation means there will always be potential for growth. As an investor, that should be comforting. Yes, the stock was hit during the financial crisis, but it wasn’t hit as hard as most stocks throughout the broader market. And it turned out to be a phenomenal buying opportunity. In other words, any significant drops in the stock price might present an opportunity to add to a position. And let’s not forget the 2.30 percent yield. Not a bad bonus.

In regards to company culture, 71 percent of employees would recommend the company to a friend, and 94 percent of employees approve of CEO Inge G. Thulin. These are impressive numbers.

The chart below compares basic fundamentals for 3M, General Electric Company (NYSE:GE), and Johnson & Johnson (NYSE:JNJ).

MMM GE JNJ
Trailing P/E 17.45 17.51 23.01
Forward P/E 15.07 12.99 14.63
Profit Margin 14.80% 9.71% 15.22%
ROE 25.70% 12.17% 15.76%
Operating Cash Flow 5.47B 29.48B 14.88B
Dividend Yield 2.30% 3.30% 3.10%
Short Position 2.00% 0.90% 2.60%

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

T = Technicals Are Strong

3M has been a steady performer for decades.

1 Month Year-To-Date 1 Year 3 Year
MMM 3.30% 20.71% 37.04% 52.64%
GE 5.14% 13.98% 32.33% 59.11%
JNJ -0.26% 22.98% 42.06% 57.83%

At $110.61, 3M is trading above its averages.

50-Day SMA 108.41
200-Day SMA 101.63
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E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for 3M is stronger than the industry average of 1.10.

Debt-To-Equity Cash Long-Term Debt
MMM 0.32 4.38B 5.94B
GE 3.08 89.78B 397.41B
JNJ 0.24 21.67B 15.89B

E = Earnings Have Been Steady

It might sound repetitive, but steady is the name of the game for 3M. Savvy investors would want nothing else. You might not make 100 percent in six months like some popular growth stocks, but you don’t have to worry about a severe gap down overnight, either.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 25,269 23,123 26,662 29,611 29,904
Diluted EPS ($) 4.89 4.52 5.63 5.96 6.32

Looking at the last quarter on a year-over-year basis, revenue and earnings have improved. Revenue and earnings also improved on a sequential basis.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 7,486 7,534 7,497 7,387 7,634
Diluted EPS ($) 1.59 1.66 1.65 1.41 1.61

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

Conclusion

3M has strong margins, solid cash flow, quality debt management, a solid company culture, superb innovation, and it tends to focus on the bottom line. Investors looking for a steady, dividend-paying stock for the long haul should consider 3M.

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As always, 3M is an OUTPERFORM.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

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