Valuation: 3M (MMM)

 Over the next few weeks, I hope to do an individual valuation of each of the components of the Dow Jones Industrial Average.  For a brief overview of the Dow, please see our Glance at the Dow – a snapshot of the valuations on March 10.  When I have completed the individual valuations, I will put together another overview.

Company Profile:  3M (MMM) (obtained via Google Finance)3M Company (3M) is a diversified technology company with a presence in various businesses, including industrial and transportation, healthcare, display and graphics, consumer and office, safety, security and protection services, and electro and communications. The Company is a diversified global manufacturer and marketer of a variety of products. 3M manages its operations in six business segments: Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security and Protection Services, and Electro and Communications. The Company’s products are sold through numerous distribution channels, including directly to users and through numerous wholesalers, retailers, jobbers, distributors and dealers in a variety of trades in many countries worldwide. In April 2008, 3M completed the acquisition of Aearo Technologies Inc., a manufacturer of personal protection and energy absorbing products. 

Business and Management Review 

1) Is the business simple and understandable?

3M is in a number of businesses worldwide, but its overall strategy is simple and understandable.  The company seeks to create innovative products to sell to its customers (whether businesses or consumers) and strives to be the best company in every market it competes in. 

 2) Does the business have a consistent operating history?

The company has evolved considerably from its original operating strategy of mining corundum in the Duluth area, but over the years it refined its purpose and during the Great Depression the company expanded its services.  Since then it has followed its general strategy of finding innovative products that fill needs in the market.  Financially, the company paid its first dividend in 1916 and has achieved a positive net income for at least 10 years.

 3) Does the business have favorable long term prospects?It’s hard to imagine a world where post-its and scotch tape wouldn’t exist, but the company does need to continue to develop new products to grow.  At the bare minimum, one would expect the company to stay in business for a very long time considering many of its products are well designed and so widely used in the world today. 4) Is management rational?

While George Buckley, Chairman and CEO, has only been with the company since 2005, he has shown no reasons to think he is irrational.  The company remains devoted to its strategy, and does not seem to make unnecessary acquisitions.

 5) Is management candid with its shareholders?

The company has a standard investor relations page, with earnings reports, webcasts, etc.  A look at the latest annual report indicates a clear and detailed explanation of the company’s goals and strategy for the coming year.

  Financial and Value Review 

Defensive:

1) Size of firm

The market cap of 3M is $54.6 billion.  Pass.

 2) Strong financial condition

The company’s current ratio is about 1.7, below the 2.0 requirement.  Fail.

 3) Earnings stability

The company has had a consistently positive net income for over 10 years.  Pass.

 4) Dividend record

3M has consistently paid a dividend for over 10 years.  Pass.

 5) Earnings growth

Earnings have grown more than 1/3 over the last 10 years.  Pass.

 6) Price to earnings analysis

With a PE ratio (using our Methods) of 16.39, the requirement of under 20 is met.   Pass.

 7) Price to assets analysis

The Price to Book ratio for 3M is 4.45, higher than our 2.5 limit.  The multiple of PE to PB is higher than our requirement of 50.  Fail.

 Overall

Having passed only 5 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe 3M is suitable for the defensive investor.

  Enterprising:

1) Strong financial condition

The company’s current ratio is above 1.5 and debt to net current assets is greater than 1.1.  Pass.

 2) Earnings stability

The company has achieved a positive net income for over 5 years.  Pass.

 3) Dividend record

The company currently pays a dividend.  Pass.

 4) Earnings growth

Earnings are greater today than they were 5 years ago.  Pass.

5) Price

The price is not less than 150% of the net tangible assets.  Fail. 

Overall

We find the company to be suitable for the enterprising investor, having passed 4 out of 5 tests.

 Valuation:

Our valuation model finds a fair value to be around $170.  

Opinion:

Since the company is currently trading at about $77, we feel it is undervalued at the present time and may be a suitable investment for the enterprising investor.None of the staff of ModernGraham.com held a position in 3M at the time of publication.  Also, please read our disclaimer and Our Methods.