Actionable news
0
All posts from Actionable news
Actionable news in MMM: 3M COMPANY,

3M Company: A Market Correction Conviction Buy

Summary

3M is a leading “manufacturer of things” for businesses and consumers.

The company’s fundamentals, risk profile, and market consensus are collectively screaming "buy".

We are the beneficiaries of a 130% capital gain plus dividends since adding the stock to the Value Investing for Main Street Model Portfolio [VIMS] following the 2008 financial crisis.

But its current rich valuation has us writing “hold for now” on a 3M Post-It® Note.

We will patiently wait for the next correction to add to the position with conviction.

Welcome to the fourth installment of the Value Investing for Main Street series, exclusively on Seeking Alpha.

3M Company (NYSE:MMM), founded in 1902 as Minnesota Mining and Manufacturing, generates $30 billion in annual sales from a myriad of products for businesses and consumers, worldwide.

Because of its attractive value proposition, wide competitive moat, consistently strong fundamentals, and low-risk profile, the company is a core holding in the Value Investing for Main Street Model Portfolio [VIMS].

We added MMM to the VIMS portfolio following the 2008 financial crises at $77.78 per share, subsequently enjoying a 130% capital gain plus dividends as of the writing of this article. But its current frothy valuation has us writing "caution" and "patience' on one of the company's famous Post-It® Notes hanging from the VIMS desktop monitor.

We will patiently wait for a market correction or other event to add to our holding with conviction. Here's why.

A Corundum Conundrum

Three corundum crystals: common, ruby, and sapphire (Arkenstone/iRocks.com)

According to the company's history profile, 3M had humble beginnings in Minnesota, USA harvesting corundum, a hard and abrasive, yet gemstone quality mineral. On one hand, corundum supports industrial applications, and on the other, is cut into red ruby and blue sapphires for the retail jewelry market. Corundum's versatility was the foundation of the 3M Company's foray into manufacturing products for both businesses and consumers. But the mining aspect of the three M's was short-lived as the Crystal Bay, MN mine did not produce much corundum.

The fledgling company was forced to transition to other materials and products with a renewed focus on invention, manufacturing, technology, and marketing. Today, 3M, based in the twin city of St. Paul, MN is responsible for 55,000 products spawned from over 100,000 patents. Household brand names include Scotch® tapes and fabric protectors, Post-it® Notes, Command™ utility hooks, ACE™ and FUTURO™ sports injury wraps, and Filtrete™ furnace and water filters, not to mention an additional 33 industrial product categories.

And before we say "mature products, no growth," one-third of 3M's current sales come from products invented within the past five years. And just this year, 3M opened a state-of-the-art, $150-million research and development laboratory at its global headquarters in Minnesota. When a company invests significantly in R&D, it gains the attention of long thinking main street value investors.

Other than supporting the sector with safety and other products, the mining aspect of the three M's is long gone, but the company's staying power as a global industrial powerhouse is tough to argue. One can bet that many will, nonetheless. To be sure, contrarian and conventional views are welcomed and encouraged regardless of one's chosen market niche.

The Manufacturer of Things

Music Festival Crowd Design Installation Using 3M Products (Courtesy 3M Company)

3M Company is a large core stock in the industrial conglomerates industry within the industrials sector. As of the writing of this article, its market capitalization (current market price of one share of stock times total shares outstanding) was an approximate $109 billion. MMM's current price to earnings ratio, i.e., P/E or current stock price relative to earnings per share for the trailing twelve months [TTM] is in the low to mid 20's about the same as the Standard & Poor's 500 Index of the largest companies traded on U.S. stock exchanges.

Despite our skepticism toward forecasting, we are aware that the fiscal year forward price to earnings ratio (P/FE, or current stock price relative to one year forward forecasted earnings per share) is also in the low 20's compared to under 20 for the S&P 500. In either scenario, past or future, the P/E ratios for MMM appear inflated to the market as a whole.

MMM PE Ratio (TTM) data by YCharts

MMM's most recent earnings per share, i.e., EPS or the portion of adjusted net income to each outstanding share of common stock, is a robust $7.58. As of this writing, 3M Company was paying 57% of its EPS to shareholders in an annual dividend of $4.34, paid quarterly for a 2.43% dividend yield based on a recent closing price of $178.60 These are attractive numbers for a main street value investor committed to total return from a stock's capital appreciation and dividend payments.

MMM Normalized Diluted EPS (Annual) data by YCharts

3M enjoys a wide moat, or the subjective measurement of the competitive advantage of a company's products or services in the overall marketplace, thus creating a barrier to entry for present and potential competitors.

The company operates in about 70 countries, generating 60% of its sales from international markets in about 200 countries. Such global diversity is hard to compete with in manufacturing. What present day internet technology start-ups accomplish in short order, 3M has developed in over 100 years of traditional on-ground operations.

Understanding a company's products or services is essential to a main street value investor. If a friend or loved one asked you to invest in a yet unpatented invention of some crazy virtual reality science fiction game based on a crude drawing and a freshly minted engineering degree, would you? Love and friendship aside, probably not much, if any, of your hard earned dollars.

We want to own companies whose products or services are readily understood in principle, whether we use any or not. 3M provides its customers with products from five business groups and is a global leader in several sub-group product categories.

3M Company's Business Groups and Products

Health Care: medical and oral care products, drug delivery, and health information systems.

Safety and Graphics: personal protective equipment, safety and security products, track and trace solutions, and a broad portfolio of graphic design products.

Industrial: tapes, abrasives, adhesives, specialty materials and filtration systems to markets from purification to aerospace.

Electronics and Energy: products include power sources, telecommunications networks, and renewable energy.

Consumer: highly recognized brand names of cleaning and organization products for home and business.

(Source: 3M Company)

Each group produces multibillion-dollar revenue streams and investor appealing operating margins:

From 2016 Investor Day Presentation (Courtesy: 3M Company)

3M's Slow Growth with Steady Returns is Welcomed Here

Wall Street is notorious for demanding steady, quarter to quarter growth in sales and profits with Mr. Market pounding any stock that misses company guidance or analysts' forecasts. Legendary value investor and Warren Buffett mentor, Benjamin Graham, coined a phrase during the market's struggles in the 1930's that still holds true today, whether bull or bear market:

In the short run, the stock market is a voting machine. Over the long term, it is a weighing machine. -Benjamin Graham

What Graham apparently meant is in the near view investors (aka traders) "vote" for stocks based on popularity and sizzle, anticipating what the stock will do if it hits or misses its quarterly projections. He reasoned that stock voters often pay a premium when following the crowd. Whereas longer-term value investors...


More