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Using the Value Line Page: 3M August 13, 2010
Once known as Minnesota Mining & Manufacturing, 3M (MMM – Free Analyst Report) is a broadly diversified manufacturer. In fact, the word “broad” doesn’t really do 3M’s product line justice. The company sells more than 50,000 products across 60 countries with business segments focusing on Industrial & Transportation (31% of 2009 sales); Display and Graphics (14%); Health care (19%); Consumer and Office (15%); Electro and Communications (9%); and Safety, Security & Protection (12%). Foreign sales represented 67% of the company’s 2009 tally. (All of the above information can be found in the Business Description section of the Value Line Research Report on 3M, a copy of which can be downloaded free here and used in conjunction with this article.)
Sure, the company may be best known things like Post-It Notes, but that product is obviously just one tiny aspect of a much more diversified company—in fact, the division responsible for Post-Its wasn’t even the largest revenue generator for the company last year—Health Care was, where 3M is a global player in medical and oral care products, and drug delivery and health information systems. It’s hard to view a company with so many products across so many sectors as boring. But, when one looks at the performance of 3M’s stock on the Value Line Graph, boring it pretty much what one gets.
But, is boring bad? The answer may depend more on an investor’s overall portfolio than anything else. In Aesop’s Fable, the race between the tortoise and the hare went to the tortoise because the hare “petered” out. The moral of the story being that slow and steady wins out over longer periods. Well, 3M is sure a slow and steady stock (no matter how exciting the company’s products happen to be), and it could make for a solid foundation on which to try and catch a fleet-footed hare.
With a Timeliness Rank of 3, the stock is expected to be just an average performer over the next six to 12 months. That said, a Safety Rank of 1 puts the stock at the head of the class. Add a beta, a measure of volatility relative to the broader market, 0.80, and the stock becomes even more appealing as a core holding—or for the risk averse. (A stock with a beta of 1.00 is expected to perform in lock step with any move in the relevant index; a beta below 1.00 suggests that a stock’s movement will be muted relative to the index.) All of this information can be found in the Ranks box at the top left of every Value Line stock report.
These are big picture measures, however, and they can obscure some of the finer details. For example, the company gets top scores for Financial Strength (A++) and Stock Price Stability (100). It gets a fairly high score for Earnings Predictability (85), too. All of this can be found in the Ratings box at the bottom right of each report. The score for Price Growth Persistence, at 50, is middling. That attests to the fact that the market selloff in 2008 and early 2009 had a major impact here, as virtually every company’s shares got dragged into the malaise—but that impact, as a Growth Persistence of 50 would suggest, was no worse than average.
At the corporate level, meanwhile, 3M has a solid balance sheet, with debt amounting to just about 25% of the company’s capital structure. Moreover, it covers interest charges more than three times over. These figures are found in the Capital Structure box on the left hand side of the page. Dropping one box to the Current Position box shows similarly inspiring numbers, with current assets outdistancing current liabilities by over 2 to 1—this is known as the current ratio, which tells you how much money the company has on hand to pay down near-term obligations.
The company really is rock solid and can easily function as the cornerstone of a portfolio. That said, the future at 3M, though not exciting, isn’t exactly boring either. Value Line analyst Jeremy Butler expects the bottom line to grow at a 7.5% average annual clip over the span to 2013-2015. Granted this pace is slower then the 10% annualized earnings growth of the past 10 years (both of these figures can be found in the Annual Rates box on the left hand side of the page), but when compared to the low single-digit projections for gross domestic product (GDP) expansion in most of the markets 3M serves and the company's huge size, it is a decent rate.
Moreover, as noted above, about two-thirds of the company’s revenues stem from abroad. What that overall figure doesn’t tell you is that about half of the foreign revenue comes from faster-growing Asian economies. Moreover, the company is focusing more on innovation, with spending on research and development comprising 5.5% of 2009 sales. Management is also looking at bolt-on acquisitions and increasing supply chain efficiencies. As the Analyst Report on the page explains, these elements should combine to drive profit growth.
As an added bonus, dividends are expected to continue to increase as they have each year since 1994 (a fact that can be verified by looking at the dividends declared line in the historical portion of the Statistical Array). That said, we expect the rate of increase to slow over the three- to five-year span as earnings growth slows. Still, with a yield of 2.4%, the rate is generous enough to help pull total return expectations out to 2013 to 2015 up to the 8% to 12% range on an average annualized basis (as can be seen in the Projections box to the left of the graph).
As for the company’s current valuation, it seems reasonably valued relative to the market, posting a price to earnings ratio that is roughly in line with that of the market (the Relative P/E Ratio can be found at the top of the page to the left of the company’s name). Although that multiple is below the levels seen in the latter part of the 1990s, when the company was afforded an often-material premium to the market, it is above the level seen in the second half of the opening decade of this millennium (this data can be found in the Statistical Array). So the stock isn’t exactly a bargain at current prices, but neither is it terribly expensive.
So, although 3M isn’t likely to be a star performer over the near- or long-term, it is likely to be as consistent as it has been for years. Slow and steady isn’t all that bad, especially when you are including it in a larger portfolio.