by Lawrence Meyers | November 2, 2011 8:00 am
Today, we’re looking at Dow Jones Industrial Average component 3M (NYSE:MMM). I’ve always found comfort in this stock because every time I turn around in my home, one of its products is staring me in the face.
Take a gander at just a few that I held in my hands just today: 3M glue sticks, CD-ROMs, Post-It Notes, Scotch Cassette Deck Head Cleaner, Nexcare band aids, Scotch tape (and dispenser), Oxy Carpet Cleaner, O-Cel-O Sponge cloth, Scotch-Brite pads and Scotch micro-fiber cleaning cloth Scotchgard.
Those products are known as consumer staples — as in, things people really can’t do without. Of course, 3M also sells products in multiple other industries. Its Health Care segment provides medical and surgical supplies, drug delivery systems and food safety products. The Display and Graphics segment offers optical film solutions for LCD electronic displays; computer screen filters; reflective sheeting for transportation safety; commercial graphics sheeting and systems; and mobile interactive solutions. Its Safety, Security and Protection Services segment offers personal and commercial protection products. It’s Electro and Communications segment provides packaging and interconnection devices; insulating materials, including tapes and resins; and related items.
The key driving factors regarding 3M are competition and the economy. What I love is that MMM not only deals in consumer staples, but many of the items in the broader categories are almost commercial staples. There are so many areas 3M can make money that it’s hard for it not to.
Despite being a company that’s over 100 years old, stock analysts looking out five years still see annualized earnings growth at 12%. At a stock price of $79, on FY 2011 earnings of $6, MMM stock presently trades at a P/E of 13, which is right near that long-term growth rate.
Like many Dow companies, 3M has a hoard of cash. In this case, it’s $4.52 billion, almost exactly offsetting its $4.84 billion in super-cheap (under 5% interest) debt. Trailing 12-month cash flow was $3.8 billion. MMM also had 2.5 times the amount of free cash flow necessary to pay its 2.7% dividend.
3M is a powerhouse company, a classic Dow stock, and even qualifies in my handbook as a growth play. Its history, product mix and solid free cash flow convince me to put a slight premium on its P/E valuation. If we put an 14 P/E on 3M, then, on projected 2015 earnings of $10.22 per share, and factoring in 2.7% compounded dividend yield reinvested, we get a price target of $143. That’s almost a solid double from these levels.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks. Check out Meyers’ take on other Dow Jones stocks here.
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