I don’t have 3M on my Stocks For The Recovery list but it is in a value play position according to the recent fall in price:
3m is an incredibly diverse manufacturer of countless globally used products. Not only do they have stellar consumer products, such as scotch tape, post it notes, air filters, sandpapers, dust masks and countless others with which you are personally familiar, they synergistically use these technologies in various tapes, adhesives, filters, abrasives, films, coatings and the like to produce lots of items that are used in the manufacture of products. It makes 3M’s products almost indispensable to manufacturing as a whole and broadly diversified among a range of goods that 3M doesn’t even manufacture. Add in that 3M is known worldwide as a great innovator and for its high returns on invested capital and you can see why Morningstar classifies the company as a “wide moat” stock, meaning they have a large competitive advantage over others that make similar products.
Is 3M then currently at value?
3M has underperformed both GE and the S&P 500 over the five-year and especially over the 10-year term, 3M is the clear winner. This would seem to indicate value.
The company recently estimated earnings per share for 2012 at $6.25 to $6.50 (including pension obligations of about .10/share). This would put the company at 12.8 to 12.3 X 2012 earnings, and I generally consider anything below 13X earnings to be of interest. While there are other companies that have cheaper valuations, Morningstar, the king of value investing, has 3M bordering right on its five-star range due to low levels of uncertainty in its business and earnings. You’ll also notice that 3M dividends have approximately doubled since 2001, while the payout ratio has been cut almost in half.
Their trailing earnings, currently right above 13X, is slightly below its long term average, with 9X being the valuation at the depth of the recession and 20X at just before the recession. They also have very safe and comfortable levels of debt. Therefore, I would say there is a noticeable discount, although not overwhelming. However, 3M’s strong and stable business make this discount far more attractive. It’s that low risk factor that is creating a lot of the value for me, as it is always nice to have an investment that requires little thought and few headaches.
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