Ticker:
MMM
Sector:
Industrial Materials
Industry: Conglomerates
Recommendation:
Pricing
Closing Price
52-wk High
52-wk Low
Hold
$79.18 (2-12-10)
$85.19 (1-19-10)
$40.87 (3-06-09)
Company Background
Market Data
Market Cap
Total assets
Trading vol.
$56.27. B
$27.63 B
3.7M (3mo avg)
Valuation
EPS (ttm)
P/E (ttm)
Div Yield
$4.52
17.53
2.6
Profitability & Effectiveness (ttm)
ROA
10.12%
ROE
22.75%
Profit Margin 12.41%
Oper Margin 18.8%
Gross Margin 46.6%
3M is a diversified global technology and manufacturing company
offering a broad range of products. It was founded in 1902 along the
north shore of Lake Superior in Minnesota by Henry Bryan,
Herman Cable, John Dwan, William McGonagle and Dr. J. Danley
Budd. The original plan for the company was to mine the mineral
corundum which would then be sold to manufacturers of grinding
wheels. The company first began its product portfolio with sandpaper
and has grown it to over 55,000 products today. Some of the most
recognizable brands include Filtrete, Nexcare, Scotch, Post-It and
Scotch-Brite. It is currently headquartered in Maplewood Minnesota,
a suburb of St. Paul, and has over 76,000 employees worldwide. 3M
Corporation was originally known as Minnesota Mining and
Manufacturing Company and is an America Multinational
Conglomerate Corporation. It is one of 30 companies listed in the
Dow Jones Industrial Average and is also a component of the
Standard and Poor’s 500 index.
3M is a very diversified globally and continues to look for
opportunities to grow its international businesses. Some of the
major acquisitions over the past year have occurred in markets
outside the US. International sales currently account for 64% of 3M’s
total sales.
ANALYST NAME
Leslie Moore
Lcmp77@mail.missouri.edu
3M also pays a strong dividend compared to the industry
and many other holdings within our portfolio. 3M paid a dividend of
2.04 per share in 2009 and has increases its dividend yield every year
for the past 51 years.
Products
3M has over 55,000 products in the areas of displays and graphics, electronics an electrical, healthcare,
home and leisure, office, manufacturing and industry, safety, security and protection, and transportation.
Together these products brought revenues of over $6 billion as of September 2009.
SWOT Analysis
Strengths
R&D
3M is one of the most geographically dispersed and diversified corporations out there today.
As was stated earlier, the company produced over 55,000 different products in almost every market
there is. The company operates in over 60 countries with manufacturing businesses in over 35. This has
continued to be one of the biggest strengths for 3M and has allowed them to continue to push the bar
for R&D and new product development. This strong product portfolio and geographic presence has
allowed 3M to remain very stable despite changing economies and demand fluctuations.
3M has and continues to spend substantial money on R&D , with $1,293 million in 2009, and $1,404
million, $1,368 million, and $1,522million in FY2008, FY2007, and FY2006 respectively. 3M’s R&D
expenditures, at around 5% of sales annual allows 3M to maintain a sizeable competitive advantage in
new product development.
International/Geographic Presence
3M maintains a geographically diversified business presence. In 2008, The company's US operation
accounted for 36.3% of total revenues. Europe, Middle east and Africa, Asia-Pacific, and Latin America
and Canada accounted for 27.5%, 25.4%, and 10.8% of total revenues, respectively. The geographic
diversity of the company helps protect it from some demand fluctuations, although not as helpful in a
global recession as we have just experienced.
Steady Revenue Growth
3M has seen steady revenue growth, with revenue up over $25 billion in 2008, from about $20 billion in
2004. Unfortunately, revenue was down to about $23 billion in 2009, but hopefully they will be back on
track this year.
Weaknesses
Class Action Suit
In May 2009, current and former employees of 3M filed a class action lawsuit in US District Court
for the Northern District of California alleging age discrimination in violation of the Age Discrimination
in Employment Act (ADEA). The potential class of plaintiffs includes more than 6,000 current and
former 3M employees, including approximately 50 men and women who have already opted in to the
lawsuit. The complaint alleges that since at least 2001 3M intentionally has discriminated against
employees over age 46 in performance appraisals, training, promotions, and pay because it perceives
them as unwilling or unable to accept or adequately implement 3M's new management techniques. As the
final indignity, 3M fires or forces these older employees into retirement or resignation, according to the
complaint.
Poor performance of Display and Graphics Segment
In FY2008, the
display and graphics segment of the company recorded revenues of $3,255 million in FY2008,
compared with $3,904 million in FY2007, a decrease of 16.6% compared with FY2007. A weak
performance of this segment, which contributed about 13% of the company’s revenues in FY2008,
would have an unfavorable impact on the company’s financial performance. Third quarter 2009 sales in
this segment were pretty flat with that of 3rd quarter 2008, but about a third of what they were in 2007.
Opportunities
Acquisitions
Acquisitions are also a major opportunity moving forward with 3M. The company made a
number of very strategic acquisitions in 2008 which includes companies such as Food Diagnostics and
Meguiars. 3M has also made plans to spend about $1 billion on acquisitions in the next year. Considering
this, Acquisitions should continue to be a big source of growth within 3M.
Expansion Into Renewable Energy Sources
In February of 2009 the company formed a Renewable Energy Division that it expected to
help organic growth. The segment will offer a broad array of products combining both enhancements to
existing products offered by 3M as well as new product development all of which focus on energy
generation and energy management. The energy generation products will focus on solar, wind,
geothermal, and biodiesel energy products solutions that include adhesives, films, tapes and coatings.
Technology and Supply Expansions
In 2008 and 2009, 3M has made strategic supply expansions such as a deal they struck with Amperex
Technologies, (ATL) to become a strategic supplier or cathode materials and to work jointly with ATL to
develop new cathode, anode, and electrolyte materials for the fast-growing lithium-ion battery industry.
Lithium-ion batteries are used in handheld consumer electronics devices and in automobiles. Under the
agreement, 3M granted ATL a license to 3M intellectual property for the use of 3M NMC cathode
materials in lithium-ion batteries.
Also, in June, 3M made an agreement with SUSS Microtech to to expand access to 3M
Wafer Support System (WSS) equipment for temporary wafer bonding of ultrathin wafers required
for 3-D packaging. As part of this non-exclusive agreement, SUSS MicroTec becomes an authorized
equipment supplier for the 3M WSS and will manufacture and sell XBC300 and CBC300 wafer
bonders configured to use 3M’s WSS materials including 3M Liquid UV-Curable Adhesive and
light-To-heat conversion coating. Under the agreement, both companies will work closely to address
customer demands for high-performance process solutions that support high-volume manufacturing
with a competitive cost of ownership. These and other expansions should help 3M increase its product
excellence.
Threats
Economy
The biggest threat to 3M is that of a double dip recession. 3M operates globally in the
industrial materials market. Sales decreased in 2009, and both industrial and consumer spending need
to pick up for 3M to recover.
Environment
Environmental regulations also pose a substantial threat to 3M. 3M operates many facilities that are
involved in chemical processes, and increased regulation could be costly. To avoid the sting of new
regulation, 3M should implement as many new changes and efficiencies as it can now. The company has
to allocate resources regularly to environment compliance cost, which increases the company's operating
costs.
Competition
As a diversified industrial company, 3M has competition from a variety of companies, many of which are
also holdings in the fund. Competitors include Johnson and Johnson, H.B. Fuller, Bayer, Kimberly Clark,
GE, and many others. Looking at the chart, you can see that 3M has kept up with, and in the past 6
months or so outperformed the S&P and several of its main competitors. This may be attributed to the
success of its restructuring plan, acquisitions, and strategic partnerships that has been the focus of much
of 3M growth recently.
3M versus the S&P and selected competitors during the last 12 Months
Financial analysis
TTM
ROE
ROA
Debt/Equity
PE
17.5
22.75
10.12
0.42
2008
32
13.77
0.53
2007
37.74
17.81
0.35
2006
38.4
18.42
0.11
2005
31.24
15.52
0.13
2004
32.74
15.61
0.07
2003
32.68
14.6
0.22
2002
22.67
13.19
0.36
2001
27.8
9.82
0.25
2000
28.84
12.54
0.15
1 Year Ago 5 Year High 5 Year Average 5 Year Low
10.1
21
15.8
9
Above I have includes a trend of some of 3M’s financial ratios over the past few years. 3M saw its ROE
grow from 2002 to 2007, and ROA grow from 2001 to 2006. Both ratios decreased in 2008 and 2009,
down to around where they were in 2002, which is typical of the business cycle. To 3M’s credit, is the
low level of debt that 3M has maintained. 3M’s debt /equity ratio has rarely fallen below 50%. This has
positioned the company well for future acquisition and expansions that management has set out to engage
in.
Div.
ROE
ROA
Yeild
P/E
EPS
22.75
10.12
2.6
17.53
4.52
MMM
9.95
1.41
2.6
15.4
1.01
GE
35.56
9.71
4.1
13.01
4.52
KMB
26.58
14.25
3.1
14.26
4.4
JNJ
3M versus General Electric, Johnson and Johnson, and Kimberly Clark (Current)
From at look at a few of its competitors, It looks like 3M is competing well when it comes to EPS, surely
a result of recent restructuring. It is my hope that this cost-cutting measure has not stripped 3M of talent
that will be necessary for growth when the economy picks up. IT looks like 3M does ok with ROE,
although Kimberly Clark is the real winner here. The dividend yield could also use a little work, if 3 M
hopes to compete with Johnson and Johnson and Kimberly Clark. Finally 3M is clearly the most
expensive stock here with a PE ratio several points higher than all of its competitors listed. This may be a
sign that the stock may be overvalued, although a P/E ratio under 20 shouldn’t be a huge indicator. You
can see a graph of the average P/E rato for the Industrials industry hovers around 20.
As I showed before, 3M has been outperforming several of its competitors in terms of stock price in the
past 6 months. During the past 3 years however, 3M has pretty much followed JNJ and KMB., all three
of which have outperformed the S&P Considering that both of these stocks are currently offering higher
dividend yields at a lower price than 3M I feel that for it to compete with its competitors it will need to
continue its efficiency measures, continue growth, and most of all increase its dividend. If that is not the
case, I feel we might see the stock price fall, at least in the short run.
3M versus
S&P and selected completers over the last three years
Valuation
For the valuation of 3M I will be using the Warren Buffet Owner Earnings Model. Using this
model I will look at three important factors to determine the overall intrinsic value of 3M. The model
will also allow for the valuation to be compared to different values related to growth rates, market
returns, and Discount rates.
Discount Rate
In order to calculate a discount rate we must look at the risk free rate, beta, and the equity market risk
premium. Using an average beta of .8 and risk free rate of .1% (current 3 month t-bill rate) and a market
return of 12% we can calculate a discount rate of
k =.01+ .8*(.12-.01) = 10%, (rounded up)
So, we get a pretty common discount rate of 10%.
Growth Rates
From Year end 2008, to year end 2009, 3M saw about a 7.8% decrease in growth. Do to the diversified
nature of its product lines; 3M should see growth as consumer and business spending picks up. I used a
0% growth rate for 2010, 2% for 2011, 4% for 2012, and then 5% growth through 2014 before returning
to the historical average of 8% for five years, which has been the standard that many of my peers have
followed thus far, following with a growth rate of 5% for the following perpetuity.
Intrinsic Value
After setting it up y discount rates, my model gave me a value of $76.28 per share, a few dollars under its
current price of $79.50. .
Recommendation: Hold
Although I was a little conservative in my valuation of 3M, I feel that this stock’s price is right on target,
giving me the assumption that this stock is a hold. While the companies P/E ratio, at 17.51 is a few points
lower than its five year average of 15.8, if the stock price were to drop down from $79.50 to my valuation
of $76.28, the P/E ratio will be more in line with its five year average. I feel that in the short run the
company’s stock price my fall by just a few dollars.
While 3M has seen some decreased growth in the past two years, Its low debt, and commitment to R&D
should see the company return to growth in the next few years. Until then, the company’s steady
dividend makes it an easier hold than some stocks. While, the dividend yield is lower than some
companies, such as Johnson and Johnson, and Kimberly Clark, I feel that its commitment to growth both
in product development and acquisitions, fueled by its exceptionally low debt levels, offsets this.
Considering this, I feel that 3M will continue its moderately strong dividend and additionally see
moderate growth in the next few years.
In ending I recommend we hold this stock, as it provides a steady dividend and opportunities for future
growth. IF the consensus of the group is to invest in stocks that have an exceptionally high dividend
yield, the group may want to sell some of the funds holdings, and invest in more shares of Johnson and
Johnson or in Kimberly Klark.
Financial statements to added when the 2009 10-K is released.
Resources
3M 3rd Quarter Report
Google Finance: http://www.google.com/finance?q=NYSE:MMM
(For trailing twelve month financial data)
Yahoo Finance
Seekingalpha.com