3M Company (MMM, Financial) reported its first-quarter earnings results in late April. The numbers easily topped results for the prior year and surpassed Wall Street analysts' expectations. The company also posted strong organic growth rates and an improvement in margins.
While the stock isn't as attractively priced as it was the last time I looked at the company in-depth, is now still a good time to pick up shares given the improving fundamentals and long history of dividend increases?
Earnings highlights
3M reported first-quarter earnings results on April 27. The company's adjusted earnings per share increased 27% to $2.77, which was 48 cents above estimates. Revenue increased nearly 10% to $8.9 billion and was $460 million ahead of what analysts had anticipated.
Organic growth has been a major issue for the company in recent years, with declines sometimes occurring in the double-digits and rarely growing more than a low single-digit percentage. That changed in the most recent quarter as organic local-currency growth was 8%.
All business segments had organic growth at least in the high single-digits and operating margin of at least 21%, even as rising raw material and logistics costs were a partial headwind to results.
Safety and Transportation led the way with organic growth of 10.3%. Covid-19 remains a tailwind for 3M as respirators added 6.4% of this organic growth. However, year-over-year growth would still have been positive excluding pandemic related sales. This segment has seen a rebound in several end markets, such as industrial, automotive, construction and electronics. As a result, demand for auto body repair, roofing granules, electrical original equipment manufacturing and adhesives and tapes was very high. The growth in industrial related product lines is a positive sign for 3M, and industry as a whole, as it means customers likely expect the economy to continue to improve from this point, hence the strong results. Rising input and logistic costs were an issue, but Safety and Transportation's operating margin improved 70 basis points to 24.4%.
Transportation and Electronics was the second-best performer as this segment posted 9.8% organic growth. This segment continues to see gains in the areas of data center, semiconductor, interconnect and consumer electronics. The company noted that TVs and laptops remain in high demand, likely due to various levels of social distancing throughout markets. While many areas have relaxed restrictions at least somewhat, demand for entertainment at home remains viable. The operating margin expanded 260 basis points to 23.3%
Health Care grew 9.3% with the operating margin improving 120 basis points to 22.7%. A higher number of patient visits led to excellent progress in oral care. Many consumers put off these doctor visits during the worst of the pandemic and are only now catching up on oral care procedures. Covid-19 also continues to aid gains for separation and purification. This business should continue to enjoy solid growth due to the ramp up in Covid-19 vaccine production. With less than half of the U.S. population, not to mention much of the world, yet to receive a single dose of the vaccine, this area should be a source of strength for 3M for some time. On the negative side, total healthcare procedures remain below pre-pandemic levels, resulting in some pain for this business.
Organic growth for the Consumer segment was 7.8%. With many workers still working from home it is not surprising that home improvement results remain elevated. Office and stationery performed well as the return-to-school and work trend started to accelerate. Operating margins contracted 30 basis points to 21.1% due to higher advertising, merchandising and manufacturing expenses.
3M's balance continues to be solid. The company had total assets of $47.2 billion, current assets of $15.3 billion and cash and equivalents of $5.1 billion at quarter's end compared to total liabilities of $33.4 billion and current liabilities of $8.4 billion. The company has total debt of $19.1 billion, with $1.6 billion of obligations maturing within the next year. One major positive is that net debt of $13 billion is $5 billion less than the first-quarter of 2020. The company distributed $858 million of dividends to shareholders while repurchasing $231 million shares during the quarter.
Guidance
3M reaffirmed its guidance for 2021, expecting organic local currency growth of 3% to 6%. This implies weaker year-over-year organic growth for the remainder of the year compared to the first-quarter, but is still an improvement over a slight gain or a decline that the company has experienced in recent years. Earnings per share are expected in a range of $9.20 to $9.70, which is an 8% improvement at the midpoint. Even reaching the low end of this range would be an increase from 2019 pre-pandemic levels, though it would still be below $10.46 of earnings per share for 2018.
Investors can take this to mean that the company seems to have gotten through the worst of the pandemic, but still has room for improvement. This could mean that the share price, which is up more than 27% since I last discussed the company, could be headed even higher as the business improves.
Valuation analysis
Using Monday's closing price of $207.33 and the midpoint of company guidance for earnings per share, 3M has a forward price-earnings ratio of 21.9. This is above the stock's five- and 10-year average price-earnings ratios of 20.5 and 18.8, respectively. Shares are overvalued using the historical multiple, but with better fundamentals and room for continued improvement, 3M has earned the higher multiple in my opinion.
3M actually looks slightly undervalued looking at the long-term average dividend yield. Currently, shares provide a yield of 2.9%. The average yield was 2.7% from 2011 through 2020. Today's yield is also more than double the average yield of the S&P 500 index.
According to the GuruFocus Value chart, the stock is "modestly overvalued."
With a GF Value of $181.50, 3M has a price-to-GF-Value ratio of 1.14. Shares would have to decline 12.5% to reach the GF Value.
Final thoughts
Investors have been waiting for 3M to produce a high-quality quarter, and the company delivered. Each business showed impressive organic growth with multiple product lines within each segment adding to results.
Of course, the market has already bid up shares and the stock is now fairly valued or slightly overvalued on a number of different valuation methods. Shares are also sitting right up against the 52-week high.
That being said, 3M's business still has a ways to go to recapture previous highs for earnings, and it owns one of the longest dividend growth streaks in the market.
Therefore, in my view, investors looking for a company with improving fundamentals and income may still want to consider owning 3M.
Author disclosure: the author maintains a long position in 3M.
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
