Company Profile (obtained from Google Finance): 3M Company (3M) is a diversified technology company. The Company operates in six segments: industrial and transportation; healthcare; consumer and office; safety, security and protection services; display and graphics, and electro and communications businesses. 3M products are sold through a number of distribution channels, including directly to users and through wholesalers, retailers, jobbers, distributors and dealers in a range of trades in a number of countries worldwide. In April 2012, it acquired CodeRyte Inc. In September 2012, it acquired the business of Federal Signal Technologies Group (FSTech) from Federal Signal Corporation. On November 28, 2012, the Company acquired Ceradyne, Inc.
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|Value Based on 3% Growth||$89.26|
|Value Based on 0% Growth||$52.33|
|Market Implied Growth Rate||6.90%|
|Net Current Asset Value (NCAV)||-$3.75|
Balance Sheet – 9/30/2013
Earnings Per Share
Earnings Per Share – ModernGraham
When we last looked at 3M (view our last valuation here), it was rated as suitable for the Enterprising Investor and overvalued. This time, the result is no different; though the valuation itself has increased, the market has also increased its price level. The Defensive Investor remains turned off by the current ratio and the high PEmg and PB ratios. As a result, Enterprising Investors should feel comfortable keeping 3M on a watch list to see if the price lowers to a place that is closer to the intrinsic value. In addition, Enterprising Investors may wish to do further research into some other companies, such as by reviewing the ModernGraham Valuation of Honeywell International and the ModernGraham valuation of Hewlett-Packard Company. As for the valuation, the company has grown EPSmg (normalized earnings) from $4.88 in 2009 to an estimated $6.16 for 2013. This level of growth is impressive, but does not support the market’s implied estimate of 6.9%. As a result, the company appears to be overvalued presently.
What do you think? What value would you put on 3M Company (MMM)? Is the company suitable only for Enterprising Investors? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens? It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: The author did not hold a position in 3M Company (MMM) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Photo Credit: Andrew Magill