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3M Fails to Outperform Like it Did Two Qtrs Ago

 

Stock (Symbol)

3M (MMM)

Stock Price

$206

Sector
Food & Necessities
Data is as of
August 8, 2017
Expected to Report
Oct 23
Company Description
3m_logo3M Company operates in five business segments: Industrial (automotive original equipment manufacturer (OEM) and automotive aftermarket, electronics, appliance, paper and printing, packaging, food and beverage, construction), Safety and Graphics (safety, security and productivity of people), Electronics and Energy (electronics and energy markets, including solutions for electronic devices, telecommunications networks, electrical products, power generation and distribution, infrastructure protection), Health Care (medical clinics and hospitals, pharmaceuticals, dental and orthodontic practitioners, health information systems) and Consumer (consumer retail, office retail, home improvement, building maintenance). Source: Thomson Financial
Sharek’s Take
David Sharek3M (MMM) just missed profit estimates of $2.55 by 30 cents last qrt. I think people got too excited after MMM beat and upped 2qtrs ago, and after analysts pushed last qtr’s estimate up 32 cents in anticipation of continued strength. But 3M couldn’t keep the momentum that high, and profit growth clocked in at 8% last qtr, vs. expectations of 23%. Why are all these little things important? Because the stock ran up from $180 to $210 in the Spring of 2017 and hasn’t seen $210 since it reported more than three weeks ago. Known for Post-It notes, Minnesota Mining and Manufacturing got its roots in selling sandpaper, and made its first sale in $1906 for $2 — four years after the company was founded. In 1925 Scotch tape was invented, Scotchgard was first sold in 1956, and Thinsulate thermal insulation was introduced in 1979. It 1980 the yellow Post-It note came to market. Today 3M has five business divisions: Health Care (31% of 2016 sales), Safety & Graphics which includes yellow safety vests (25%), Industrial (23%), Electronics & Energy (21%), and Consumer including Post-It notes (24%). Like most multinationals, 3M was having trouble growing in past years due to the strong dollar. In 2016 F/X reduced sales by 6.8% year-on-year. Now the USD is trending down, and with 60% of business International the declining dollar is great for profits. Last qtr F/X hurt profits $0.05 after hedging, but that took profit growth from 8% to 5%. MMM is a safe stock with an Estimated Long-Term Growth Rate of 9% per year plus a 3% dividend that’s increased every year since 1959. Earlier this year it increased the dividend by 6%, the 59th straight year of increases. The company also does enormous stock buybacks, with this year’s expected to be between $2 billion and $3.5 billion. Although this is a great buy-and-hold stock it’s P/E is high at 23. The median P/E had been between 14 and 20 every year the last ten years. I think the stock is overvalued and has been pumped up by ETFs that invest in large stocks in the market. My Fair Value is a P/E of 20 which is $179 a share. With the stock above $200 I feel MMM could come down a bit.
One Year Chart
I still scratch my head when I see this chart. Why in the world did this stock go from $170-180 to $210? In April Managment stated it expects a lower tax rate this year, thus analysts boosted 2017 estimates from $8.62 to $8.95. This qtr that number is $8.94. People must have felt profit growth would increase again? Well it’s still around the 8% level. Qtrly profit Estimates are 3%, 5%, 8% and 8%. Maybe that means 8% growth ahead, but qtrly estimates just got reduced.
Fair Value
Wow, we could have gotten this stock at 14x earnings years ago? Well back then it was fairly valued. Now with stocks high the benchmark for MMM seems to be 20x earnings. At least that’s what I think the stock is worth. I do feel MMM could tumble when we eventually go into a recession as profits could decline with the P/E contracting. But that won’t happen for a while as the declining USD is not hampering profits like it used to and is also boosting exports, thus GDP growth is good.
Bottom Line
3M is a quality stock that families and trust funds could own it for decades. The Est. LTG is 9% per year in addition to a 3% yield which could mean double-digit returns. But that P/E of 23 means the stock is high, and although things are going good now, I feel a lot of future gains are already priced into the stock. MMM is on my radar for the Conservative Growth Portfolio. I missed this run higher, thus my analysis of this stock is shoddy at best.
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