Stock of the Day - April 16, 2009 - MMM

3M Corporation (MMM)

3M (MMM) is the company that manufacturers Scotch tape and Post-it notes. But to limit the gigantic industrial company to two well-known products would misrepresent the organization. 3M is constantly developing and producing new products that are viable in categories varying from health care to security systems. These products range from the reflective materials that make highway signs visible at night, to automated library systems, to the films placed on LCD televisions that increase brightness. The company does business internationally in 60 different countries and is constantly innovating. 3M gains value from its multiple types of diversification: diversity in products, in customers, and in geographic regions.

The wide variety of the company’s products allows 3M to sell its goods to multiple entities. To illustrate this point, consider the previous examples. 3M would sell highway signs to governments, automated library systems to institutions, and LCD televisions to retailers or end consumers. This is advantageous for 3M because if one product purchaser is suffering from macroeconomic conditions, another type of customer may still need to buy its products.

3M is diversified geographically as well. The company does two-thirds of its business outside of the United States with 30% in Asia and 25% in Europe. This form of diversification allows the company’s revenues to remain stable when currencies waver in strength or weakness. If the yen is strong, 3M will capitalize on its strength. Likewise, if the U.S. dollar is weak, the company will make up for domestic sales with international sales.

With roughly 30% of its sales coming from Asian markets, 3M is well poised to take advantage of China’s economic recovery. China’s government is investing heavily in infrastructure and technology. 3M’s industrial products account for 31% of the company’s overall business with products such as industrial tapes and special abrasives for construction.

3M’s diversified product portfolio is grounded by an incredibly stable balance sheet and overall business structure. The company has a market capitalization of 37.28 billion and rests on $2.22 billion in cash. It is currently paying out a dividend of $2.04, a current yield of 3.9%, and has steadily increased dividends for the past 51 years with the most recent boost made in February.

The company fared better than most throughout the dismal year that was 2008. Sales were up 3.3% on the year over 2007, while net income was down .4%. Earnings per share actually increased by 3.8% to $5.17 in 2008 due to stock buybacks. Despite this relative success, the company’s forecasts for 2009 are not as optimistic. 3M expects sales to drop between 6% to 7% and full-year earnings per share to drop from 9% to 17%. The company based these projections on a lack of economic visibility for the future.

3M is not merely waiting for the economy to turn around. The company trimmed 2,400 jobs in the fourth quarter of 2008 as part of a restructuring program that the company is undertaking to save over $700 million in 2009. More recently, the company offered 3,600 employees retirement packages, and it will be cutting capital expenditures by 30% in 2009.

The company’s stock has most recently traded at $53.73 after hitting its 52-week low of $40.87 in March. The company’s stock price steadily fell after the release of lowered projections in February until it hit is low, and has since bounced back. 3M will announce its earnings for the 1^st quarter of 2009 on April 24^th. While analysts’ expectations are low, I still expect the stock price to take a hit after that date due to lower earnings numbers.

I would wait till after the earnings report and a subsequent pullback in stock price to buy 3M. The company is a powerful international player that is incredibly well diversified. I believe that 3M is currently undervalued and positioned for a great deal of long-term growth. With this said, it would still be preferable to purchase stock at a lower level: ideally in the low-to-mid 40s.

 

-Matt Schwartz

College Trillionaire