3 Reasons 3M Stock Still Isn’t a Buy

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Don’t look now, but tech giant 3M (MMM) has gained over 13% in the past month, nearly doubling the run of the broader market, helped in part by its recently-released third-quarter earnings report.

NYSE:MMM

3M — a company with a market cap over $97 billion, sales of around $32 billion and 90,000 employees — operates in five business segments: industrial, safety and graphics, electronics and energy, health care and consumer.

Despite this diversification and the recent bounce, 3M stock is down approximately 5% since the start of the year. In fact, a closer look at the company suggests that, even with the recent earnings beat considered, investors should proceed with caution. Here are three reasons why.

Are Valuations Too High?

While 3M stock is sitting in the red so far this year, zooming out reveals that it has boasted relatively steady upward momentum over the last five year. That’s good news, except for the fact that it puts shares of 3M stock at around 18 times forward earnings — further considering the company is only slated for 8% annualized earnings growth long-term. This ties closely to the second reason to be wary about MMM …

Earnings Growth Is Declining

No matter how you slice it, earnings — which are perhaps the most fundamental of all fundamentals — for 3M aren’t pretty. The most recent quarter, for instance, came in better than analysts expected, but the good news really stops there. While earnings per share expanded almost 4%, rising from $2.01 a year ago to $2.05 this quarter, that was in part due to a decline in shares outstanding. Net income, on the other hand, dropped year-over-year.

Meanwhile, analyst earnings estimates for the current quarter, current year and next year are all declining. For the cherry on top, the company has only topped earnings estimates in two of the last five quarters.

Global Presence Is Becoming a Challenge

The company’s earnings growth troubles are compounded by the global climate as well. 3M has quite the international presence thanks to its diversification, which makes a strong dollar also a huge headwind. The company may struggle to meet its already shrugworthy, already declining projected growth rates in the face of adverse foreign currency translations. In fact, in the most recent report, net sales slid 5% year-over-year, thanks in part to this very issue.

Perhaps the only bright spot for 3M stock right now is its dividend; a payout yielding more than 2.6% is especially nice, considering the finish line for the current low-rate environment keeps getting pushed back. Plus, MMM has a nice track record of upping its quarterly payout.

But, it’s payout ratio is already close to 50%. That’s going to get squeezed if the company maintains its dividend growth streak while earnings are contracting. Plus, if MMM instead decides to skip a dividend payment, it could shake the confidence of existing investors.

Put another way, even a solid dividend can be a double-edged sword … or perhaps a leading indicator of trouble. Don’t let the payout or one earnings beat and bounce fool you into getting serious with this struggling behemoth.

Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/3-reasons-mmm-3m-stock-still-isnt-a-buy/.

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