The Top-Down Stock Valuation Approach Starts With An Economic Analysis A Financial Analysis of 3M Company

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A Financial Analysis of 3M Company

Not so often do companies hold such a vast array of businesses. Whoever thought companies could have a manufacturing, financial, and television segment but not succeed is wrong. The conglomerate industry is diversified. Holding these companies through uncertain times illustrate strong investing knowledge. The current state of the economy is a bit instable, so owning a company like GE is a good investment. However, there are other companies in this industry. These companies not only have a strong business model, but they have excellent growth potential and solid valuation. One of these companies is 3M (MMM).

Before examining the financial statements of 3M, it is vital to understand the variety of activities this company performs. According to Reuters, 3M is a “diversified technology company with a global 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 industrial and transportation business includes products such as food and beverage, personal care, and automobiles. More specific industrial products include polyester, foil, and tape. Specific transportation products are insulation components like catalytic converters. The health care segment produces supplies for medical, surgical, and dental use. The display and office business employs workers to produce stationary products, supply products, and home-improvement products. Office products like Post-it Memo Pads are also produced in this section. 3M also controls a safety segment and an electro and communications section, where the latter creates products including telecommunication fiber-optic products.

The main idea to take from the different business of 3M is the hedging strategy. Instead of focusing on only one industry, 3M can have a section of its business prosper, while another section’s growth slows. It is true that 3M may not experience any incredible share price appreciation because of its strategy, but 3M will not experience any dramatic share price fallout either. As evidence, since 1999, 3M has only had one distinct negative share price calendar year (2005), and that year only yielded a loss of 6%. Each year during this timeline before and after 2005, 3M has been flat or shown share price appreciation. In 2006 the share price rose about 5%, and so far in 2007 the share price is up over 30%. Throughout this period, the US economy has been through exuberant growth to panicked recession. However, because of 3M’s strategy and investor’s trust in such a well-respected brand, 3M has managed to avoid so terrible economic periods.

While, 3M’s business model is great, there are many other corporations in this industry that have similar strategies. What differentiates 3M however is its fundamentals. Over the last fiscal year, according to Reuters, 3M saw revenue at $22.9 billion dollars. This is an outstanding number. What is more outstanding is relative sales growth. 3M’s recent sales figure was 7.86% higher than it was the previous fiscal year. Not only is this increase higher than its five year average, but it is also higher than the five year average of the conglomerate industry. Considering the size of sales volume, this is a great sign of growth. What is even more outstanding is earnings growth. 3M has been efficient with its costs and saw an increase in profits of over 32.76% last fiscal year. This number is higher than the company’s five year average at 23.13% and also higher than the industry’s average at 13.87%. Comparing this figure to industry competitors, United Technologies only saw a 13.72% increase during the same time period, Emerson Electric saw a 20.26% increase, and GE only had profits grow by 12.16%. Clearly 3M is growing and using good internal controls to reduce cost.

Another way of illustrating 3M’s strong growth is through its margins. Gross margins for 3M at 47.94% are quite high compared to the industry’s average at 39.01%. 3M’s gross margins are also higher than United Technologies’ 26.78% figure, Emerson’s 35.70% number, and GE’s 42.83% margin. In addition, 3M’s operating margins at 28.04% are also above the industry average at 15.24%, not to mention above the rest of the industry’s respective figures. The more important margin, net profit margin, is also in favor of 3M. The past fiscal year illustrated this figure at 18.61%. The number is quite high compared to the company’s five year average at 14.70%. In addition, 3M’s number beats the industry average of 11.81%, United Technologies’ figure at 8.10%, Emerson’s margin at 9.29%, and GE’s number at 12.88%. 3M is working very efficiently compared to its industry peers. It can use the extra cents it makes for every dollar to help the company and investors. Capital spending over the past five years for 3M is growing at 3.57%. This number is higher than the industry average of 0.98% and higher than most of the aforementioned companies. Higher capital spending now means even more efficiency in the future for 3M. Lower costs mean wider margins and a greater ability for 3M to buy back shares from investors or increase its dividend.

While 3M’s growth looks excellent, some investors may question the company’s valuation. According to Reuters, the conglomerate industry has an earnings multiple of 19.92. Fortunately, for investors wanting to buy shares of this company, the forward P/E ratio for 3M is 18.99. This number is very similar to GE, Emerson, and United Technologies. In addition, 3M’s forward price to sales ration of 2.82 is also similar to the mentioned companies. This indicator illustrates that not only is 3M growing quite strongly, but 3M is also undervalued compared to its growth across this industry. High growth and low valuation typically create a strong recipe for success. 3M’s PEG ratio of 1.67 is near or below most of the industry competitors which again illustrates low valuation given growth.

In terms of other 3M strengths, this company is solvent with a 1.28 current ratio. The company is owned by more than 67% institutional investors. This indicates that the smartest investors like this company and want to take the risk to own it. The company’s ROE of 39.97% is excellent. This number is above its five year average of 33.31% and also above the industry average of 20.97%. This number obliterates GE, United Technologies, and Emerson’s figures. And if higher margins continue to be present for 3M, future buybacks will lead to even increased returns. 3M’s ROA of 19.82% and ROI of 27.80% are also quite strong. 3M is also very efficient when it comes to turnover. Receiver turnover at 6.99 beats the industry average of 4.27 which means consumers pay their discounts or credit on average every 50 days. Asset turnover at 1.07 is also stronger than the industry average of 0.53, which means 3M’s asset moves usually mean larger sales. Overall, there are plenty of advantages to owning 3M and its fundamentals.

Therefore, now would be an excellent time to think about purchasing 3M shares. The dividend yield for this company at 2.04% is very reasonable. In addition, technical indicators illustrate appreciating 50 day SMA and EMA indicators coupled with an up trending Parabolic SAR. The recent cross over of SMA and EMA a few weeks back indicates that 3M is ready to rise and should enjoy higher share price appreciation until the lines converge. Therefore, given the fundamental, technical, and strategy analysis, there are plenty of reasons for investors to purchase shares of 3M as a part of a diversified portfolio.

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