For several years, I’ve been a fan of 3M (NYSE:MMM). It’s one of these classic American companies that has expanded over decades, has always innovated at the right time, punched holes into markets globally to keep from being made obsolete and has conquered the world in ways that most people might not think of.
Is 3M still killing it? Is the company still able to keep up amidst global economic troubles? Like most behemoths, it goes through fits and starts, but overall remains a sound and solid company.
Let’s not kid ourselves — much of 3M’s success is the result of enormous product diversity. It manufactures goods that are used in multiple industries on a global basis. It tackles medical and surgical supplies, drug-delivery systems and food safety. Then there’s the division producing optical film for LCD displays, computer screen filters and reflective sheeting for transportation safety.
Perhaps you’ve used 3M’s personal or commercial protection products? How about packaging and and insulating materials?
Seriously. Next time you’re out and about, keep your eyes open for the 3M logo. You’ll see it everywhere. Heck, you don’t even have to do that. Look around your home, and you’ll find 3M glue sticks, CD-ROMs, Post-it Notes, Nexcare bandages, Scotch tape, OXY Carpet Cleaner, Scotch-Brite pads and lots more.
How important are silly little things like Post-its to 3M? Enough to put a $10 million marketing campaign behind it, even though the product is already a household name.
3M 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. 3M also plans to enter the aerospace arena to find new markets for many of its industrial products.
3M isn’t exactly “killing it’ on the earnings front, but I’m not concerned about that. Specifically, net income for the last quarter increased just 3.9% to $991 million on a 4.25% increase in revenue to $7.39 billion. China, which had been sluggish, saw a 10% increase in non-electronics revenue.
CEO Inge Thulin is in tune with struggling areas of the company and is taking each unit under a strategic review. He’ll make a quick decision whether to sell or fix it. I like management that responds proactively.
Financially, 3M’s triumph remains its robust free cash flow, which came in about $3.85 billion for fiscal 2012. No matter how tough conditions might be, if a company can generate huge amounts of cash, it isn’t going out of business. 3M sits on $4.5 billion in cash and about $4.9 billion in cheap debt.
The problem, however, is no amount of free cash flow will give a stock enough deserved premium to justify buying it when it’s super-expensive. 3M trades at about $100, and is set to earn $6.84 per share this year, giving it a P/E of about 15. With annualized growth projected at 9.83%, even with a premium of 20% for free cash flow, I see 3M as being at least 20% overvalued.
It’s a great company — just wait for a better price.
As of this writing, Lawrence Meyers didn’t own any securities mentioned here.