Note: I use the Stock Selection Guide Software and its methodologies from the CSA to perform the bulk of my analysis on stocks.
3M Company (3M) is a diversified technology company with a global presence in various businesses, including industrial and transportation, healthcare, display and graphics, consumer and office, safety, security and protection services, and electro and communications. The Company manages its operations in six operating business segments: Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security and Protection Services, and Electro and Communications.
Revenue Profile and Projection:
Let’s start by examining management’s ability to convert the companies products and services into increased sales on a consistent basis, year after year. To pass the revenue test, the company must possess the following two attributes:
1. a steady and consistent revenue uptrend
2. the ability to continue to grow revenues in the future, giving consideration to such things as demographics and market trends (i.e. the move from film to digital)
The revenue profile:
The revenue profile for MMM is presented below. Based on a visual analysis of this trend, an investor would say the trend for revenues for the company is up, but not very aggressively. There was a period in 2001 when revenues decreased and it took 2 years of the company to catch up to 2000 levels.
Being conservative, but not too conservative, a revenue growth rate must be extrapolated to project a revenue number 5 years from now. This will not be an exact science but will provide us with a projection of what revenues you can expect the company to generate in the future. This is important because it is revenues that lead to earnings. One important thing to consider is whether revenue growth is accelerating or decelerating – this helps make a judgment call on what growth rate to apply.
Historical Growth Rates:
|1 – 10||4.5%|
|6 – 10||2.8%|
|1 – 5||7.8%|
|1 – 2||7.0%|
The growth rate has increased in the last 5 years, but dropped a bit in the past 2. The longer term growth rates are a pretty low 4.5%. The tough years the company faced 6 to 10 years ago are definitely reflected in the low growth rate of 2.8%. It is good to see that performance has turned around and management has been able to accelerate revenue growth in the past 5 years. I see this as a positive thing.
Doing some additional research on 3M through Value Line’s free reports for Dow 30 stocks, I found that they have projected 3M’s revenue growth to be 7%. However, I want to be a bit more conservative than this given the poor performance from 2000 – 2002. I have chosen a conservative revenue growth rate of 6.0% which would mean, at the end of 2011 the revenue for MMM will be approximately $30,676 million per year.
EPS Profile and Projection:
I want to now move onto looking at the company’s earnings per share – how well the company turns those revenues into earnings for shareholders. To pass the EPS test, the company must possess the following two attributes:
1. a steady and consistent EPS uptrend
2. the ability to continue to grow EPS in the future
The EPS profile:
The EPS profile for MMM is presented below. Based on a visual analysis of this trend, an investor would say the trend for revenues for the company is mostly up.
Just as with the revenue projections, being conservative, but not too conservative, a EPS growth rate must be extrapolated to project a revenue number 5 years from now. This will not be an exact science but will provide us with a projection of what EPS you can expect the company to generate in the future. Again it is important to consider is whether revenue growth is accelerating or decelerating – this helps make a judgment call on what growth rate to apply.
Historical Growth Rates:
|1 – 10||10.3%|
|6 – 10||5.1%|
|1 – 5||16.2%|
|1 – 2||9.4%|
We can see the poorer performance that happened in 2000 – 2002 reflected in the EPS growth. In fact, earnings actually decreased in 2001 and recovered in 2004. The last 5 years saw very strong growth – the highest in 10 years, but has dropped off in the past 2 years. They still are showing a respectable 9.4% growth in earnings. Once again, I went to Value Line and saw that they are projecting a earnings growth rate of 5%. I like to see EPS growth projected at lower than revenues as it is rare for a company to grow earnings at a faster rate than revenues. With this data, and the historical growth rates from above, I have chosen a conservative EPS growth rate of 5% which would mean, at the end of 2011 the EPS for MMM will be approximately $5.73 per year.
As a dividend investor, I of course look at dividends. Usually, I already know at this point that the company at least pays a dividend and has a strong history of increasing their dividend payouts on a consistent basis. The only analysis I do on dividends at this point is to quickly look at the dividend history over time. I want to see at least 10 years of uninterrupted and growing dividend payments to shareholders. The chart below shows the last 10 years of dividend payments:
Share Price Valuation:
I use 2 methods to compare a company’s share price. The first is looking at the dividend yield to see how the current yield compares to the 10 year average yield for the company. The second is determining a buy range for the stock through the analysis of the recent price for $1 of EPS in relation to historical prices. Here is my results of my valuation.
Current Dividend Yield: 2.01%
Average Dividend Yield for past 10 Years: 2.3%
Is the current dividend yield higher than the average dividend yield for past 10 years: No
The fact that the dividend yield is lower today than its average over the past 10 years suggests that the stock is overvalued. I need to further evaluate the price to make a decision however. I like to look more closely at the P/E ratio to determine what my buy price range should be.
Recent Price (how is the current price sitting in relation to historical averages):
EPS Projected Growth Rate: 5%
Recent P/E ratio: 20.3 (= current stock price divided by current year projected EPS of $4.71)
Relative P/E ratio: 0.94 (= recent P/E divided by 10 year average P/E)
Contradictory to the valuation based on dividend yield above that suggested the stock was overpriced, the relative P/E 0.94 indicates that the stock is trading at a discount compared to the 10 year historical P/E values. Not a large amount, but slightly undervalued.
Upside Price (based on the EPS projection, what price might we expect if the growth continues on the trend we saw in our analysis of revenue and EPS):
Upside price estimate: $108.87 (= upside EPS in 5 years X upside P/E ratio in 5 years)
Upside P/E ratio estimate: 19 (= 10 year average high P/E ratio)
Downside Price (based on the EPS projection, what price might we expect if the growth continues on the trend we saw in our analysis of revenue and EPS):
Downside price estimate: $76.50 (= current price – (1 – 20% decline))
The buy range for MMM is $76.50 to $87.29
This is calculated by:
(Upside Price minus – Downside Price) divided by 3 = $10.79 which is the size of the buying zones I use (buy/wait/sell). The buy zone is simply the downside price plus the zone size.
Based on MMM’s current price of $95.62, I am putting this stock at a hold. There was a real sharp drop a few months ago in 3M’s share price, but the company has since rebounded and is hitting new highs. That being said, the dividend growth has been very good so if someone is looking for a pretty steady stock, then MMM may fit that bill. Personally, I will wait to see if the stock drops to around the $85 level before making a purchase.
Disclosure: The Dividend Guy does not own shares in MMM. This is my analysis of the stock and is not investment advice. Do your own research.