Tuesday, July 26, 2011

Should You Invest in 3M?

3M (NYSE: MMM) reports second quarter earnings Tuesday and they're expected to be up. Should you buy its shares?

3M -- famous for Post-It Notes and letting their employees spending 20% of their time on self-directed projects -- is expected to report $1.59 a share -- five cents more than it did in 2010. And if 3M does meet or exceed expectations it will be the latest in a strong of strong reports.

3M has been using acquisitions to spur its growth. For example, in 2010 it made $1.8 billion worth of deals and most recently announced that it would acquire French home improvement company, GPI Group. And to its credit, 3M is "very well placed in emerging markets, such as Asia and Latin America," according to Morningstar.

Is all the good news on 3M already reflected in its stock price or does it have further to rise?

Here are three reasons to consider investing:
  • Out-earned its capital cost. 3M is earning more than its cost of capital – and it’s improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2010, 3M’s EVA momentum was 3%, based on 2010 revenue of $23.1 billion, and EVA that improved from $2.2 billion in 2009 to $2.9 billion in 2010, using a 9% weighted average cost of capital.
  • Strong first quarter earnings. In April, 3M reported a 16% rise in earnings which beat analysts' estimates. 3M also raised its estimate for 2011 earnings 2% from between $5.95 and $6.20 to a range from $6.05 to $6.25 a share.3M enjoyed a big jump in sales in China and India that is expected to continue to contribute to its growth.
  • Decent dividend. 3M pays a 2.3% dividend yield and it's been raising that dividend at a 2.5% annual rate over the last five years.
Here are two negatives for the stock:
  • Solid growth but more debt-laden balance sheet. 3M has grown solidly. Its $27.6 billion in revenues have increased at an average rate of 4.7% over the last five years and its net income of $4.2 billion has risen at a 5.4% annual rate over that period. To finance acquisitions, its debt has grown nearly twice as fast as its cash. Its debt climbed at 44% annual rate from $1 billion (2009) to $4.3 billion (2010) while its cash rose at a 24% annual rate from $1.9 billion to $4.5 billion.
  • Slightly over-priced stock. 3M's price to earnings to growth (PEG) ratio of 1.29 makes it somewhat expensive (a PEG of 1.0 is considered fairly priced). 3M's P/E is 16.3 and its earnings are expected to grow 12.6% to $7.11 in 2012.
After a 10% rise in the last year, 3M stock is hardly cheap. But if investors are going to profit from investing in 3M, the key will be for management to earn a greater proportion of its revenues from faster growing emerging markets.

I consider 3M to be a solid company and a stable stock. Just don't expect enormous capital appreciation if you buy its shares.


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