Why 3M stock has strong upside potential - A Fundamental Analysis

$MMM – 3M Inc. Stock Analysis: Company Overview: $MMM – 3M Inc. is a global, diversified technology company that operates in the following businesses: Safety/Industrial, Transportation/Electronics, Health Care, and Consumer. 3M develops their products in -house, and thus has an unusually high product development, and research and development costs. 3M operates in 4 main business segments, which include: Safety/Industrial, Transportation/Electronics, Health Care, and Consumer. These business segments appear on some of their quarterly and annual financial reports, and their performance in each of these segments will be discussed later. Investment Information: Recent SEC Filings: In this section, I will summarize 3M’s most recent SEC filings to help you get an idea of what is currently going on in their business. SpinCo Merger (Reverse Morris Trust Transaction) 8-K Report: On December 13th, 2021, 3M sold one of their subsidiary companies (“SpinCo. Corp.”) to Neogen (one of their subsidiary companies “Nova RMT Sub Inc.) 3M’s SpinCo is a food safety business, and the transaction implies that it is worth $5.3B (USD). 3M will retain 50.1% of the SpinCo subsidiary, and Neogen will assume the other 49.9% stake in the subsidiary. This transaction “Reverse Morris” allows for a tax-free transfer of the SpinCO subsidiary, which is beneficial for both parties involved. Q3 2021 Financial Report: $8.9B in sales (7.1% YoY increase) $2.45 Earnings per Share Free Cash Flow of $1.5B (decreased by 29% YoY) $1.4B in dividends distributed, and shares repurchased. Updated guidance for sales growth by 2%, and decreased their EPS guidance by $0.20/share Departure, Election, or Appointment of Officers (8-K): On October 15th, 2021, 3M appointed Eric Hammes as the Executive VP and Chief Country Governance Officer. Eric joined 3M in 1997 and has held several leadership positions in the finance, accounting, manufacturing, and supply chain segments of 3M’s business. Competitors: In order to undergo the comparable analysis, we need to get an idea of their closest competitors. These competitors must operate in the same space, operate in similar geographies, be of similar market cap, and have valid financial ratios. Using this criterion, I cam up with the following. $HON – Honeywell International: Honeywell International.is a diversified technology and manufacturing company. Its Aerospace segment offers several electronics, software, physical parts, and power units to their clientele in the aviation business. Honeywell’s Building Technologies segment offers applications software, switches, and electronics that assist in the building and construction industries. Its Performance Materials and Technologies segment offers automation control, software services; catalysts and adsorbents, equipment; bullet-resistant armor, nylon, and computer chips. The company's Safety and Productivity Solutions segment provides personal protection equipment, apparel; cloud-based notification/emergency messaging; software solutions; and custom-engineered sensors. $GE – General Electric: General Electric operates as a high-tech industrial company. The company's Power segment offers gas turbines for utilities, power producers, and industrial applications; steam power technology (boilers, generators etc.); and reactor technologies. This segment services may industries, such as marine, oil and gas, mining, rail, metals, test systems, and water. GE’s Renewable Energy segment provides various solutions for onshore and offshore wind, blades, hydro, storage, solar, and grid solutions, and hybrid renewables. The company's Aviation segment designs/produces commercial and military aircraft engines, integrated engine components, electric power, and mechanical aircraft systems; and provides aftermarket services. Its Healthcare segment develops, manufactures, markets, and services various medical devices and software. The company's Capital segment offers aviation leasing and financing and working capital services; financial solutions and underwriting capabilities; and insurance products. $EMR – Emerson Electric: Emerson Electric Co. manufactures technology/engineering products for industrial, commercial, and consumer markets worldwide. The Automation Solutions segment offers measurement and analytical instrumentation, industrial valves and equipment, and process control software and systems. It serves the oil and gas, refining, chemicals, power generation, life sciences, food and beverage, automotive, pulp and paper, metals and mining, and municipal water supplies markets. The Commercial & Residential Solutions segment offers residential and commercial heating and air conditioning products, monitoring equipment and electronic controls for gas and electric heating systems. $PH – Parker-Hannifin: Parker-Hannifin Corporation manufactures sells motion and control technologies and systems for various mobile, industrial, and aerospace markets worldwide. The Company's Diversified Industrial segment offers sealing, shielding, thermal products. Filters, control solutions, and electromechanical components. Its Aerospace Systems segment offers products for use in commercial and military airframe and engine programs, fuel systems and components, pilot controls, and wheels/brakes. Financial Information: Yearly Financial Performance (Good): In 2020, 3M’s net sales essentially remained constant, however, they were able to decrease their operating expense by 3.6%, which helped to contribute to a higher operating income and a higher operating margin. Additionally, 3M was able to increase their net income in 2020 by 18% which is very high, and their EPS ended the year at $9.32 (up from 2019’s EPS of $7.92). Yearly Financial Performance (Bad): In 2020, 3M’s Transportation and Electronic segment’s revenues decreased by 8% and represents their only declining segment. However, within these segments the Abrasives, Advanced Materials, Aerospace, and Oral Care performed the worst, declining 15%, 17%, 16%, and 19% respectively. Q3 2021 Financial Performance (Good): In Q3 2021, 3M increased their net income by 0.3%, which might not sound good, however, considering 3M’s operating income decreased in this time period any increase in net income is great. Furthermore, 3M was able to keep their EPS (basic and diluted) constant during this time, which is again good considering their decline in operating income. Q3 2021 Financial Performance (Bad): In Q3 2021, 3M increased their net sales by 7% YoY, now you may be wondering “how is this bad”? Well, during this same period, 3M increased their operating expenses by 11%, which contributes to a lower operating margin. This can be seen by their YoY decline in operating income of 6% Share Repurchasing: In the first 3 quarters of 2021 (Jan 1 – September 30th), 3M reported repurchasing 6,675,484 at an average cost basis of $190.88/share (totalling $1.27B worth of shares repurchased). This would have increased the value of existing shares by approximately 1.2%, which is a great sign for longer term investors. Investment Valuation: Comparable Analyses: (Spreadsheet found at the end of this analysis) By comparing 3M’s financial ratios to that of their publicly listed competition (listed above in the “competitors” section) I found the following: PE Ratio: Based off of 3M’s Price to Earnings Ratio in comparison to their competitors, $MMM should be valued at $232.72/share, which would imply a share price increase of 29%. This is a little high, so I decided to take another comparable. P/B Ratio: 3M’s P/B ratio (compared to their counterparts) indicates that their fair value is $143.52/share, which would translate into a downside risk of 20%. This is a little low and contradicts the results achieved via the P/E comparable. EV/Revenue Ratio: 3M’s EV/Revenue ratio indicates that their fair value is $174.82/share, which would translate into a small downside of 3%. This is the most realistic estimate of the 3 comparable analyses, however I decided to take the average of the three comparable analyses to have one comparable price target. Comparable Valuation: Based off of the above comparable analyses, I landed on one final (comparable) valuation of $183.69/share, which would imply an increase of 2%. This indicates that 3M is very close to their fair value. DCF: (Visualization found at the end of this analysis) By inputting the necessary data into my DCF model, it arrived at a fair valuation of $MMM stock of $205/share, which implies a potential upside to this investment of 14%. This is pretty close to the result as achieved in my comparable valuation, which indicates that 3M is sitting at/around their fair value and has a little bit of room to run up. Dividend Discount Model: (Visual at the end of this analysis) My dividend discount model uses the current annual dividend amount in combination with 3M’s average annual dividend growth (over the past 4 years), and their WACC (as found in the DCF model). By using these metrics, I was able to find 3M’s fair value to be $203/share, which implies an upside of 13%. Once again this is very close to their current fair value, which indicates that 3M is a decent buy. Overall Valuation: In order to provide simplicity, I wanted to come to one final, all-encompassing valuation for the $MMM stock. I did this through taking the average valuation of the Average Comparable, the DCF, and the Dividend Discount Model. By doing this I arrived at a price target for the $MMM stock of $197/share, which implies an upside of 9.5%. Investment Plan: My plan for an investment in the $MMM stock would go as follows: Enter into a position below the fair value, preferably at/below $180/share. Hold long-term (with dividend re-investment) Re-evaluate the position as new data is released (especially the 10-Q (quarterly) and 10-K (annual) reports). Risks: Financial Performance: In 2020, and Q3 2021, there were a few concerning metrics that arose from their financial statements. These include their cost of good sold out-pacing their revenue growth (means margins are shrinking). If these trends continue, it could invalidate my DCF model, and their fair value would be lower than I estimated. Catalysts: Financial Performance: In 2020 and Q3 of 2021, 3M reported decent earnings, but there are still areas to improve upon in order to attract more investors, and potentially increase the share price. Firstly, their net income has been steadily increasing (which is good), despite their operating income either increasing or decreasing. If they can find a way to keep their operating income to consistently grow,, translating in higher increases in their net incomes this would be good. Share Repurchasing: Over the past couple of years, 3M has been repurchasing more shares than they have been issuing. This is a very good trend for investors to note, as every year their shares represent a larger stake in their company. These repurchases help investors to return more on their invested capital.

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Why 3M stock has strong upside potential - A Fundamental Analysis

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$MMM - 3M Inc. Stock Analysis:

Company Overview:

$MMM - 3M Inc. is a global, diversified technology company that operates in the following businesses: Safety/Industrial, Transportation/Electronics, Health Care, and Consumer. 3M develops their products in -house, and thus has an unusually high product development, and research and development costs.

3M operates in 4 main business segments, which include: Safety/Industrial, Transportation/Electronics, Health Care, and Consumer. These business segments appear on some of their quarterly and annual financial reports, and their performance in each of these segments will be discussed later.

Investment Information:

Recent SEC Filings:

In this section, I will summarize 3M's most recent SEC filings to help you get an idea of what is currently going on in their business.

  • SpinCo Merger (Reverse Morris Trust Transaction) 8-K Report:
    • On December 13th, 2021, 3M sold one of their subsidiary companies (“SpinCo. Corp.”) to Neogen (one of their subsidiary companies “Nova RMT Sub Inc.)
    • 3M's SpinCo is a food safety business, and the transaction implies that it is worth $5.3B (USD). 3M will retain 50.1% of the SpinCo subsidiary, and Neogen will assume the other 49.9% stake in the subsidiary.
    • This transaction “Reverse Morris” allows for a tax-free transfer of the SpinCO subsidiary, which is beneficial for both parties involved.
  • Q3 2021 Financial Report:
    • $8.9B in sales (7.1% YoY increase)
    • $2.45 Earnings per Share
    • Free Cash Flow of $1.5B (decreased by 29% YoY)
    • $1.4B in dividends distributed, and shares repurchased.
    • Updated guidance for sales growth by 2%, and decreased their EPS guidance by $0.20/share
  • Departure, Election, or Appointment of Officers (8-K):
    • On October 15th, 2021, 3M appointed Eric Hammes as the Executive VP and Chief Country Governance Officer. Eric joined 3M in 1997 and has held several leadership positions in the finance, accounting, manufacturing, and supply chain segments of 3M's business.

Competitors:

In order to undergo the comparable analysis, we need to get an idea of their closest competitors. These competitors must operate in the same space, operate in similar geographies, be of similar market cap, and have valid financial ratios. Using this criterion, I cam up with the following.

  • $HON - Honeywell International: Honeywell International.is a diversified technology and manufacturing company. Its Aerospace segment offers several electronics, software, physical parts, and power units to their clientele in the aviation business. Honeywell's Building Technologies segment offers applications software, switches, and electronics that assist in the building and construction industries. Its Performance Materials and Technologies segment offers automation control, software services; catalysts and adsorbents, equipment; bullet-resistant armor, nylon, and computer chips. The company's Safety and Productivity Solutions segment provides personal protection equipment, apparel; cloud-based notification/emergency messaging; software solutions; and custom-engineered sensors.
  • $GE - General Electric: General Electric operates as a high-tech industrial company. The company's Power segment offers gas turbines for utilities, power producers, and industrial applications; steam power technology (boilers, generators etc.); and reactor technologies. This segment services may industries, such as marine, oil and gas, mining, rail, metals, test systems, and water. GE's Renewable Energy segment provides various solutions for onshore and offshore wind, blades, hydro, storage, solar, and grid solutions, and hybrid renewables. The company's Aviation segment designs/produces commercial and military aircraft engines, integrated engine components, electric power, and mechanical aircraft systems; and provides aftermarket services. Its Healthcare segment develops, manufactures, markets, and services various medical devices and software. The company's Capital segment offers aviation leasing and financing and working capital services; financial solutions and underwriting capabilities; and insurance products.
  • $EMR - Emerson Electric: Emerson Electric Co. manufactures technology/engineering products for industrial, commercial, and consumer markets worldwide. The Automation Solutions segment offers measurement and analytical instrumentation, industrial valves and equipment, and process control software and systems. It serves the oil and gas, refining, chemicals, power generation, life sciences, food and beverage, automotive, pulp and paper, metals and mining, and municipal water supplies markets. The Commercial & Residential Solutions segment offers residential and commercial heating and air conditioning products, monitoring equipment and electronic controls for gas and electric heating systems.
  • $PH - Parker-Hannifin: Parker-Hannifin Corporation manufactures sells motion and control technologies and systems for various mobile, industrial, and aerospace markets worldwide. The Company's Diversified Industrial segment offers sealing, shielding, thermal products. Filters, control solutions, and electromechanical components. Its Aerospace Systems segment offers products for use in commercial and military airframe and engine programs, fuel systems and components, pilot controls, and wheels/brakes.

Financial Information:

  • Yearly Financial Performance (Good): In 2020, 3M's net sales essentially remained constant, however, they were able to decrease their operating expense by 3.6%, which helped to contribute to a higher operating income and a higher operating margin. Additionally, 3M was able to increase their net income in 2020 by 18% which is very high, and their EPS ended the year at $9.32 (up from 2019's EPS of $7.92).
  • Yearly Financial Performance (Bad): In 2020, 3M's Transportation and Electronic segment's revenues decreased by 8% and represents their only declining segment. However, within these segments the Abrasives, Advanced Materials, Aerospace, and Oral Care performed the worst, declining 15%, 17%, 16%, and 19% respectively.
  • Q3 2021 Financial Performance (Good): In Q3 2021, 3M increased their net income by 0.3%, which might not sound good, however, considering 3M's operating income decreased in this time period any increase in net income is great. Furthermore, 3M was able to keep their EPS (basic and diluted) constant during this time, which is again good considering their decline in operating income.
  • Q3 2021 Financial Performance (Bad): In Q3 2021, 3M increased their net sales by 7% YoY, now you may be wondering “how is this bad”? Well, during this same period, 3M increased their operating expenses by 11%, which contributes to a lower operating margin. This can be seen by their YoY decline in operating income of 6%
  • Share Repurchasing: In the first 3 quarters of 2021 (Jan 1 - September 30th), 3M reported repurchasing 6,675,484 at an average cost basis of $190.88/share (totalling $1.27B worth of shares repurchased). This would have increased the value of existing shares by approximately 1.2%, which is a great sign for longer term investors.

Investment Valuation:

Comparable Analyses: (Spreadsheet found at the end of this analysis)

By comparing 3M's financial ratios to that of their publicly listed competition (listed above in the “competitors” section) I found the following:

PE Ratio:

Based off of 3M's Price to Earnings Ratio in comparison to their competitors, $MMM should be valued at $232.72/share, which would imply a share price increase of 29%. This is a little high, so I decided to take another comparable.

P/B Ratio:

3M's P/B ratio (compared to their counterparts) indicates that their fair value is $143.52/share, which would translate into a downside risk of 20%. This is a little low and contradicts the results achieved via the P/E comparable.

EV/Revenue Ratio:

3M's EV/Revenue ratio indicates that their fair value is $174.82/share, which would translate into a small downside of 3%. This is the most realistic estimate of the 3 comparable analyses, however I decided to take the average of the three comparable analyses to have one comparable price target.

Comparable Valuation:

Based off of the above comparable analyses, I landed on one final (comparable) valuation of $183.69/share, which would imply an increase of 2%. This indicates that 3M is very close to their fair value.

DCF: (Visualization found at the end of this analysis)

By inputting the necessary data into my DCF model, it arrived at a fair valuation of $MMM stock of $205/share, which implies a potential upside to this investment of 14%. This is pretty close to the result as achieved in my comparable valuation, which indicates that 3M is sitting at/around their fair value and has a little bit of room to run up.

Dividend Discount Model: (Visual at the end of this analysis)

My dividend discount model uses the current annual dividend amount in combination with 3M's average annual dividend growth (over the past 4 years), and their WACC (as found in the DCF model). By using these metrics, I was able to find 3M's fair value to be $203/share, which implies an upside of 13%. Once again this is very close to their current fair value, which indicates that 3M is a decent buy.

Overall Valuation:

In order to provide simplicity, I wanted to come to one final, all-encompassing valuation for the $MMM stock. I did this through taking the average valuation of the Average Comparable, the DCF, and the Dividend Discount Model. By doing this I arrived at a price target for the $MMM stock of $197/share, which implies an upside of 9.5%.

Investment Plan:

My plan for an investment in the $MMM stock would go as follows:

  • Enter into a position below the fair value, preferably at/below $180/share.
  • Hold long-term (with dividend re-investment)
  • Re-evaluate the position as new data is released (especially the 10-Q (quarterly) and 10-K (annual) reports).

Risks:

  • Financial Performance: In 2020, and Q3 2021, there were a few concerning metrics that arose from their financial statements. These include their cost of good sold out-pacing their revenue growth (means margins are shrinking). If these trends continue, it could invalidate my DCF model, and their fair value would be lower than I estimated.

Catalysts:

  • Financial Performance: In 2020 and Q3 of 2021, 3M reported decent earnings, but there are still areas to improve upon in order to attract more investors, and potentially increase the share price. Firstly, their net income has been steadily increasing (which is good), despite their operating income either increasing or decreasing. If they can find a way to keep their operating income to consistently grow,, translating in higher increases in their net incomes this would be good.
  • Share Repurchasing: Over the past couple of years, 3M has been repurchasing more shares than they have been issuing. This is a very good trend for investors to note, as every year their shares represent a larger stake in their company. These repurchases help investors to return more on their invested capital.

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read-time
7 min
197.00
Target Price
9/ 10
Confidence
6-12 Months
Timeframe
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Earnings Release
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News
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SEC
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