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

The Value Investor's Handbook

This is a link to an Investopedia article about Value Investing, one of my favorite investing strategies.  This investing style helped Warren Buffet become the richest man in the world, and it should help you a little more with your own investments as well.  Enjoy! 

http://investopedia.com/articles/fundamental-analysis/09/value-investing.asp

Stock of the Day - April 12, 2009 - LMT

Lockheed Martin Corporation (LMT)

Lockheed Martin (LMT) is the world’s largest military weapons maker, and it is the Pentagon’s biggest contractor by sales.  The company’s main competitors include Boeing (BA), Northrop Grumman (NOC), and General Dynamics (GD), all three of which are also defense companies.

Lockheed Martin, which is currently trading at $73.32, is around 40% below its 52-week high of $120.30, and it has lost 15% of its stock value in 2009.  I think Lockheed Martin is undervalued right now in the $70’s, as the lack of certainty about the company’s future earnings power has kept the share prices down.

Companies like Lockheed Martin are extremely dependent on government decisions in regards to military spending, as 85% of LMT’s sales come directly from the U.S. Government.  So, while investors and analysts eagerly anticipated Defense Secretary Robert Gates’ defense budget plans that were announced last week, there was heavy selling pressure due to uncertainty about the budget plans.  Many investors and analysts believed that the Obama administration would be drastically cutting the defense budget, as the current administration’s agenda seems to be focused less on the military than George Bush’s was. 

But, Gates’ proposed budget plans came as a surprise to many people who thought he would cut spending, as he proposed a $534 billion defense budget (up 4% from last year).  While this might sound great, a 4% increase implies that spending will essentially stay flat when accounting for inflation.  So, what did the budget plan include that will directly affect Lockheed Martin?

One of the most controversial issues in the proposed budget is Gates’ plan to limit Lockheed Martin’s F-22 Raptor fighter jets at the 187 already ordered, essentially cutting the extra 60 that were supposed to be purchased.  The F-22 is the most technologically advanced fighter jet today, as it is capable of hovering in place and detecting and killing an enemy from more than 200 miles away.  But these fighter jets cost $354 million each, and in this recession in which the government is spending trillions of dollars, we just cannot afford to make more fighter jets than is completely necessary.  But all is not lost for Lockheed Martin, as Gates’ budget plans included details that will counteract the decrease in spending on the F-22.  Gates said that the government would begin focusing on Lockheed-made F-35 Joint Striker jets, as they are cheaper and more suitable for today’s war environment.

With Obama in charge and an understanding that war has changed in the 21^st century from conventional warfare to more irregular conflicts with enemies that are more unpredictable, defense spending will continue to change.  Gates has made a point in his new budget to move away from equipment used in more conventional wars, such as heavily armored tanks, to weapons that are more fit for defending ourselves against the new-age enemies.  With technologically advanced weapons and jets such as the F-22 and the F-35, Lockheed Martin should continue to be a dominant player in the defense industry. 

Another aspect of today’s economic and political landscape to consider when investing in a defense company is to realize that we are in a recession, and that the government has to make a conscious effort to reign in unnecessary spending like never before.  While the proposed defense budget did increase by 4% this year, many cuts were made to the most expensive projects, and to many of the projects that were deemed as unnecessary or too speculative.  The U.S. Government has made it a point to produce weapons that are necessary for today’s wars, and I believe that this is great news for Lockheed Martin.

In terms of the company’s stock price, I think it was unfairly brought down on speculation that Obama and his team would drastically lower the defense budget.  Now that it is clear that the budget has increased instead of decreased, it seems ridiculous to me that Lockheed Martin shares are still trading 40% below their 52-week highs.  Last time I checked, there is still a lot of conflict in countries like Afghanistan, and the problems in the rest of the Middle East do not seem to be ending anytime soon.  As long as there are wars to be fought, Lockheed Martin’s services will be in high demand.  At these depressed prices, and with continued demand from the government, I believe that Lockheed Martin is a definite buy. 

(Having said this, I will not be investing any money in Lockheed Martin, as I have a moral issue with owning shares of military and weapons companies.  But, if you feel no moral issues with investing in a defense company, then I would highly suggest buying some shares of Lockheed Martin.)

 

Niki Pezeshki

College Trillionaire