MMM Stock Study (1-24-23)

I recently did a stock study on 3M Co. (MMM) with a closing price of $122.62.

CFRA writes:

     > 3M Co. is a global manufacturer operating a diversified business.
     > The firm classifies its business into four reportable segments —
     > Safety & Industrial, Transportation & Electronics, Health Care,
     > and Consumer. Most 3M products involve expertise in product
     > development, manufacturing, and marketing, with many of the
     > company’s products involving some form of coating, sealant,
     > adhesive, film or chemical additive that increases the product’s
     > overall functionality and useability for customers.

This large company was recently presented in the Aug 2022 Manifest Investing Round Table. It was also selected (out of four stocks) via audience poll to be the newest monthly addition to the portfolio. MMM is a DJI component.

I hesitate to call this a “high quality growth stock” because the historical growth has been so low. Personally, I would have panned it. I am doing this study for educational purposes to see if I can uncover any unexpected merit.

Over the last 10 years, 3M has grown sales and EPS at annualized rates of 1.3% and 4.4%, respectively. Lines are somewhat up and parallel (I guess?) with some pullbacks. I would not blame anyone for passing on the stock based on visual inspection alone [a la “barbed wire fence”].

Over the last 10 years, PTPM is relatively consistent with a last-5-year average of 20.9%. This is higher than peer (stated as HON and BBU) and industry averages. ROE has been trending higher over the last 10 years with a 5-year average of 43.2%—also higher than peer and industry averages.

Debt-to-Capital has been trending higher over the last 10 years. The last-5-year average is 59.6%. While somewhat uncomfortable, this is generally lower than peer and industry averages. Quick Ratio is a lackluster 0.87. Interest Coverage is better at 16.

I assume long-term annualized sales growth of 1% based on the following:

• CNN Business projects 3.4% YOY contraction and 3% contraction per year for ’22 and ’21-’23, respectively (based on 17 analysts).
• YF projects YOY contraction of 3.3% and 2.4% for ’22 and ’23, respectively (20 analysts).
• Zacks projects YOY contraction of 3.4% and 3.1% for ’22 and ’23, respectively (5).
• Value Line projects 3.5% growth per year from ’21-’26.
• Morningstar offers a 2-year ACE of 2.1% contraction per year.
• CFRA projects 1% per year contraction and 3% per year growth for ’21-’23 and ’21-’24, respectively.

I almost feel 1% is generous based on these estimates.

I assume long-term annualized EPS growth of 1% based on the following:

• CNN Business projects growth of 1.5% YOY and 0.5% per year for ’22 and ’21-’23, respectively, based on 17 analysts.
• MarketWatch projects annualized growth of 2% and 3.2% from ’21-’23 and ’21-’24, respectively (22 analysts).
• Nasdaq.com projects annualized contraction of 0.2% and 1.4% for ’22-’24 and ’24-’25, respectively [7, 4, and 1 analyst(s) for ’22, ’24, and ’25].
• YF projects YOY growth of 0.6% and 0.4% for ’22 and ’23, respectively, and 0.7% per year contraction for the next five years (20).
• Zacks projects YOY growth of 0.5% and 0.2% for ’22 and ’23, respectively, and 9.5% growth per year for the next five years (7).
• Value Line projects 7.1% growth per year from ’21-’26.
• M* has long-term ACE at 3.2% growth per year.
• CFRA projects 4.7% per year contraction and 0.2% per year growth for ’21-’23 and ’21-’24, respectively, along with 3-year annualized growth of 4%.

Because Q3 shows an [anomalous?] earnings spike to $11.48/share, I am projecting from the last annual data point [$10.12].

I’m using a forecast High P/E of 19. High P/E over the last 10 years has ranged from 15.1 (’12) – 30.8 (’17) with a last-5-year average of 25.7.

I’m using a forecast Low P/E of 12. Low P/E over the last 10 years has ranged from 12.3 (’20) – 21.9 (’17) with a last-5-year average of 17.9.

I’m using a Low Stock Price Forecast of $96. This is roughly 20% below the previous closing price and at least 11% below the default low price, 2020 low stock price, and 2021 low stock price.

All this results in an U/D ratio of 3.3, which makes MMM a Buy. Total Annualized Return is 13%.

Payout Ratio has trended higher over the last 10 years from 37.3% to 58.5% with a 5-year average of 60.6% (excluding 73.8% in 2019, which seems to be an upside outlier). I am estimating conservatively at 40%. This results in a PAR (using forecast average P/E rather than forecast High P/E) of 9%, which is pretty good for a large-size company.

I’m admittedly surprised to see a Buy here because I cut the estimates to minimal values while still maintaining some growth.

Furthermore, MMM is a Buy even with a margin of safety built into this study. Based on 186 Member Sentiment studies in last 90 days, averages for projected sales growth, projected EPS growth, forecast High P/E, and forecast Low P/E are 2.7%, 4.8%, 21.8, and 16.5, respectively. I’m lower on all inputs. As one additional reference point, Value Line projects an average annual P/E of 17 compared to my 15.5.