Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Undervalued Companies for the Enterprising Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how 3M Company (MMM) fares in the ModernGraham valuation model.
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. In April 2014, the Company acquired Treo Solutions.
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 – PASS
|Value Based on 3% Growth||$89.46|
|Value Based on 0% Growth||$52.44|
|Market Implied Growth Rate||6.91%|
|Net Current Asset Value (NCAV)||-$5.00|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
3M Company is suitable for Enterprising Investors but not Defensive Investors. The Defensive Investor is concerned with the low current ratio and high PEmg and PB ratios, but the company passes all of the requirements of the Enterprising Investor. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparison to other opportunities such as through a review of ModernGraham’s valuation of Honeywell International (HON) and ModernGraham’s valuation of Hewlett-Packard Co. (HPQ). From a valuation perspective, the company appears to be overvalued presently, after growing its EPSmg (normalized earnings) from $4.88 in 2009 to $6.17 for 2013. This level of demonstrated growth, while fairly strong, does not support the market’s implied estimate of 6.91% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on 3M Company (MMM)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: The author did not hold a position in 3M Company (MMM) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.