3M Just Gets Better and Better

by Lawrence Meyers | May 1, 2012 10:22 am

The only thing better than a Peter Lynch stalwart is a stalwart that insists on innovating to return to the status of growth company.  Such is the case with 3M (NYSE:MMM[1]), which refuses to rest on its laurels as a mega-cash-flow generator and dividend provider.

The results in 3M’s latest earnings report[2] may not seem like much: Revenue was up 6.3%, and net income was up 7%. But this is the fourth consecutive quarter of revenue increases, and earnings beat estimates by 10 cents.  Revenue also hit a new quarterly record.

And those numbers are just the beginning. Digging deeper, there are signs of a very strong business that’s getting stronger. Operating margins were up 1.4%, to 22%. Sales growth rose 8% in Latin America/Canada. In keeping with the earnings we’ve been seeing out of other manufacturing and industrial companies, industrial and transportation sales at 3M grew 9% globally and 13% here in the U.S.

To me, the best thing about 3M is its regular cash flow. Its diversified businesses stretch around the world,  contributing $567 million in FCF in the latest quarter alone, up $65 million from last year. But even this doesn’t tell the whole story about FCF because that number doesn’t include a voluntary contribution of $250 million to 3M’s defined-benefit pension plan. More than $1 billion was returned to shareholders in the form of $410 million in dividends (2.7% yield) and $524 million in share repurchases.

The company makes prudent and thoughtful investments both geographically and in each of its sectors. In an effort to continue innovating and growing, 3M is moving into a new sector — Natural Resource Management and Extraction. In other words, it’s hopping on the commodity and energy bandwagon.  Given the rise in prices in these two sectors, I think that’s a great move. The company also plans to enter the aerospace arena to find new markets for many of its industrial products.

3M guided estimates higher for the year. The market is looking for 7.5% growth this year, 9% next year and 10.6% thereafter. Last November, when the stock was at $78, I wrote that 3M was a buy[3] for regular and retirement accounts.  At the time, I gave it a 14x multiple on 2015 earnings of $10.22 per share.

I am revising that now to give it a 12x multiple on 2015 earnings of $9.15 per share, for a fair value of $110.  It’s not the value it was back in November, but I think waiting for a slight pullback and getting in then would be perfectly reasonable. As it is, the stock trades at a 14x multiple, so I’m probably being overly conservative in my valuation.

As of this writing, Lawrence Meyers[4] did not hold a position in any of the aforementioned securities[5].

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