With a daily gain of 5.33% and earnings per share (EPS) of $9.65, 3M Co (MMM, Financial) presents an intriguing case for value investors. This article aims to answer a crucial question: Is 3M Co significantly undervalued? To answer this, we'll delve into the company's valuation analysis, providing an insightful exploration of its intrinsic value. We invite you to read on for a comprehensive evaluation.
A Snapshot of 3M Co
3M Co, originally known as Minnesota Mining and Manufacturing, is a multinational conglomerate that has been in operation since 1902. The company, renowned for its research and development laboratory, leverages its science and technology across multiple product categories. As of 2020, 3M is organized into four business segments: safety and industrial, transportation and electronics, healthcare, and consumer. Nearly 50% of the company's revenue comes from outside the Americas, with the safety and industrial segment constituting a plurality of net sales.
When comparing the stock price and the GF Value, an estimation of fair value, 3M Co's stock appears to be significantly undervalued. The company's income breakdown can be viewed here:
Understanding the GF Value
The GF Value is a proprietary metric that represents the current intrinsic value of a stock. It is calculated based on historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future estimates of business performance. The GF Value Line offers an overview of the fair value at which the stock should ideally be traded.
According to our valuation method, 3M Co's stock is significantly undervalued. The GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $109.83 per share, 3M Co's stock is believed to be significantly undervalued.
Because 3M Co is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
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Financial Strength Analysis
Investing in companies with poor financial strength presents a higher risk of permanent loss of capital. Therefore, it's vital to carefully assess a company's financial strength before deciding to buy its stock. A great starting point for understanding a company's financial strength is its cash-to-debt ratio and interest coverage. 3M Co has a cash-to-debt ratio of 0.24, which is worse than 65.92% of companies in the Conglomerates industry. GuruFocus ranks 3M Co's overall financial strength at 6 out of 10, indicating fair financial strength.
The company's debt and cash over the past years can be viewed here:
Profitability and Growth
Investing in profitable companies, particularly those with consistent profitability over the long term, is generally less risky. A company with high profit margins is usually a safer investment than those with low profit margins. 3M Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $33.4 billion and earnings per share of $9.65. Its operating margin is 11.86%, which ranks better than 76.4% of companies in the Conglomerates industry. Overall, 3M Co's profitability is ranked 9 out of 10, indicating strong profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of 3M Co is 3.2%, which ranks worse than 55.14% of companies in the Conglomerates industry. The 3-year average EBITDA growth is 5.2%, which ranks worse than 61.52% of companies in the Conglomerates industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, 3M Co's ROIC was 9.44, while its WACC came in at 8.
The historical ROIC vs WACC comparison of 3M Co is shown below:
Conclusion
Overall, 3M Co (MMM, Financial) stock is believed to be significantly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks worse than 61.52% of companies in the Conglomerates industry. To learn more about 3M Co's stock, check out its 30-Year Financials here.
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