In this article, let's take a look at 3M Company (MMM), a $94.6 billion market cap, diversified global company that operates as a diversified technology company with manufacturing operations around 70 countries worldwide. I was impressed how the company survived to the last U.S. recession, reducing working capital to increase free cash flow and remaining profitable, so I think the next is worth to read and invest.
Japan Joint Venture
3M has recently acquired the remaining 25% stake in its joint venture with Sumitomo. After paying $865 million, the diversified U.S. manufacturer has full control of the business. This “old” joint venture has been successful for 3M because it grew its international presence in Japan. The deal sounds coherent for 3M because it is a business that it knows well. The transaction will close Sept. 1 and add $0.08 per share during the first full year after the close.
Research and development
R&D is a strong competitive advantage, because 3M focuses on the introduction of new products at high margins. Every year the company spent between 5.5% and 6% of sales to R&D. Unlike its competitors, the firm operates in different end markets and geographies, where it uses its scale and distribution channels to achieve lower costs.
Well-Diversified
The diversification across product and markets offset any specific poor result. The largest contributor to revenue is “adhesives and tapes” within the industrial segment, which makes up 10.5% of consolidated revenue, followed by the automotive and aftermarket business which contributes with 9.5% of revenues. The other 27 business lines make up the residual.
Excellent Track Record
3M has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it has increased its dividend for 56 consecutive years. The current dividend yield is 2.1%, which is quite good to protect the purchasing power, especially considering the consistency of track-record dividends payments and favorable expectations regarding dividend growth and share repurchases for the next years.
Revenues, Margins and Profitability
Looking at profitability, the revenue growth (2.6%) has outpaced the industry average. Earnings per share increased by 11.2% in the most recent quarter compared to the same quarter a year ago. During the past fiscal year, 3M increased its bottom line by earning $6.72 vs $6.31 in the prior year. This year, Wall Street expects an improvement in earnings ($7.45 vs $6.72). For tomorrow, analysts expect 3M to earn $1.91 per-share in terms of EPS when the company announces its Q2 results. (To be honest, I think it will beat the consensus).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| MMM | 3M | 26.62 |
| GE | General Electric Co. | 10 |
| JNJ | Johnson & Johnson | 18.68 |
| Ă‚ | Industry Median | 7.31 |
The company has a current ratio of 26.62% which is higher than the one exhibit by General Electric Co. (GE, Financial) and Johnson & Johnson (JNJ, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment, so this ROE looks very attractive. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time. It is great to see such a good level during so many years.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 20.9x, trading at a discount compared to an average of 24.1x for the industry. To use another metric, its price-to-book ratio of 5.4x indicates a premium versus the industry average of 1.7x while the price-to-sales ratio of 3.2x is above the industry average of 1.07x. That P/E indicates that the stock is relatively undervalued and seems to be an attractive investment relative to its peers.
As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $27.383, that is a 22.3% compound annual growth rate (CAGR). Further, 3M has demonstrated a pattern of positive earnings per share growth over the past two years.
Final Comment
As outlined in the article, several growth catalysts make me feel bullish on this stock because I think 3M will successfully integrate acquisitions and continue innovating products, while diversifying across end markets. Valuation is another key reason to considering 3M as an investment. So in this opportunity, I would recommend fundamental investors to consider this attractive option for their long-term portfolios.
Hedge fund gurus like Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio) and Bill Frels (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
