MMM Stock Study (7-5-23)

Posted by Mark on August 24, 2023 at 06:59 | Last modified: July 3, 2023 20:35

I recently did a stock study on 3M Co. (MMM) with a closing price of $101.14. Previous studies are here and here.

Value Line writes:

     > 3M Company is a diversified manufacturer and technology
     > company with operations in more than 70 countries. It is
     > among the leading manufacturers in many of the markets it
     > serves. The conglomerate currently operates four business
     > segments: Safety and Industrial (33.9% of ’22 sales);
     > Transportation and Electronics (26.0%); Health Care
     > (24.6%); Consumer (15.5%). Research & Development:
     > $1.9 billion or 5.4% of ’22 sales.

Over the past decade, this large-size company has grown sales and EPS at annualized rates of 1.3% and 4.2%, respectively. Lines are somewhat up, but hardly straight or parallel (sales declines in ’15, ’16, ’19, and ’22; EPS declines in ’17 and ’19). Stock price is near a 10-year low. Per visual inspection, this is not a high-quality growth stock. PTPM has been greater than peer and industry averages despite trending lower from 21.3% in ’13 to 18.7% in ’22 with a last-5-year mean of 19.8%.

Over the past decade, ROE has been greater than peer and industry averages while increasing from 25.1% in ’13 to 39.7% in ’22 with a last-5-year mean of 43.3%. Debt-to-Capital has also been greater than peer and industry averages while trending higher from 25.7% in ’13 to 53.4% in ’22 with a last-5-year mean of 59.4%. Interest Coverage is 13.7 and Quick Ratio is 0.8. M* gives a Standard rating for Capital Allocation and Value Line gives an A rating for Financial Strength.

MMM faces risk due to PFAS (environmental) and Combat Arms (military earplugs) litigation. In the most recent analyst report, M* assumes total liability of $24B (up from $18B three months ago).

Although M* assigns a wide/stable economic moat to the company, CFRA seems to disagree:

     > …most 3M products are commodity-like, such as roofing
     > granules or adhesives. Commodity-like products with intense
     > competition have little pricing power, making it difficult
     > to improve margins over the long term. 3M does enjoy brand
     > power on certain products, but not enough to drive overall
     > pricing growth that can keep up with inflation.

With regard to sales growth:

• CNN Business projects contraction of 6.4% YOY and 1.8% per year for ’23 and ’22-’24 (based on 16 analysts).
• YF projects YOY 6.9% contraction and 3.3% growth for ’23 and ’24, respectively (16 analysts).
• Zacks projects YOY 6.2% contraction and 3.8% growth for ’23 and ’24, respectively (4).
• Value Line projects 2.5% annualized growth from ’22-’27.
• CFRA projects contraction of 3.2% YOY and 0.2% per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 1.7% contraction per year.

I am forecasting below the long-term estimate at 1.0% per year.

With regard to EPS growth:

• CNN Business projects contraction of 14.7% YOY and 2.4% per year for ’23 and ’22-’24, respectively (based on 16 analysts), along with 5-year annualized growth of 6.4%.
• MarketWatch projects contraction of 2.8% and 0.8% growth per year for ’22-’24 and ’22-’25, respectively (19 analysts).
• Nasdaq.com projects growth of 4.7% YOY and 10.3% per year for ’24 and ’23-’25 (10, 5, and 3 analysts for ’23, ’24, and ’25, respectively).
• Seeking Alpha projects 4-year annualized growth of 4.1%.
• YF projects YOY 14.6% contraction and 10.8% growth for ’23 and ’24, respectively (17), along with 5-year annualized growth of 1.9%.
• Zacks projects YOY 14.4% contraction and 9.7% growth for ’23 and ’24, respectively (5), along with 5-year annualized growth of 9.5%.
• Value Line projects 4.2% annualized growth from ’22-’27.
• CFRA projects contraction of 18.0% YOY and 4.6% per year for ’23 and ’22-’24.
• M* projects long-term annualized growth of 1.9%.

The mean of six long-term estimates is 4.7% growth per year. I am forecasting below the range at 1.0% per year. I will use ’23 Q1 EPS of $9.65/share (annualized) as the initial value rather than ’22 EPS of $10.18.

My Forecast High P/E is 18.0. Over the past decade, high P/E has ranged from 17.9 (’22) to 30.8 (’17) with a last-5-year mean of 23.1. The last-5-year-mean average P/E is 19.4. I am forecasting near the bottom of the range (only ’22 is lower).

My Forecast Low P/E is 8.0. Over the past decade, low P/E has ranged from 10.5 (’17) to 21.9 (’22) with a last-5-year mean of 15.6. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) is the default value $77.20 based on $9.65/share initial value. This is 23.7% less than the previous closing price and 16.5% less than the 52-week low.

Over the past decade, Payout Ratio has increased from 37.8% to 58.5% in ’22 with a last-5-year average of 63.1%. I am forecasting below the entire range at 37.0%.

These inputs land MMM in the BUY zone with a U/D ratio of 3.6. Total Annualized Return (TAR) is 14.8%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-sized company at 8.5%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 116 studies over the past 90 days (52 outliers including my study excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 2.5%, 4.0%, 21.3, 14.9, and 60.1%, respectively. I am lower across the board. Value Line projects an average annual P/E of 14.0, which is lower than MS (18.1) and higher than mine (13.0).

MS high/low EPS is $12.01/$9.42 vs. my $10.14/$9.65 (per share). My high EPS is lower due to a lower forecast growth rate.

MS LSPF of $100.20 implies a Forecast Low P/E of 10.6 as opposed to the above-stated 14.9. MS LSPF is 28.6% less than the default value of 14.9 * $9.42/share = $140.36/share, which results in more conservative zoning. It remains 29.8% higher than mine, however.

MOS seems robust in the current study.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are other valuation metrics I have recently begun to monitor. Zacks reports PEG of 1.22. Relative Value (M* data) is 0.54. The latter reflects the stock as significantly undervalued.

I am also just starting to familiarize myself with Kim Butcher’s “quick and dirty DCF.” According to this method, the stock should be valued at 12 * (16.10 – [6.75 + 3.00)] = $76.20 (i.e. stock overvalued by 33%).

The litigation risk somewhat offsets what I perceive to be a robust MOS in this study. In the most recent report, M* increased its uncertainty rating to “very high” and suggested the dividend may be at risk. While MMM is a BUY under $103/share, maybe I knock another 5-10% off and look to buy under $98 or $93 in case the legal tab ends up higher than anticipated.