MMM Stock Study (10-2-23)
Posted by Mark on November 25, 2023 at 07:04 | Last modified: October 2, 2023 14:09I recently did a stock study on 3M Co. (MMM) with a closing price of $93.62. Previous studies are here, 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.
This large-size company has grown sales and EPS at annualized rates of 1.3% and 4.2%, respectively, over the last 10 years. Lines are somewhat up, straight and parallel with sales declines in ’15, ’16, ’19, and ’22 along with 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.
Over the past decade, PTPM is greater than peer and industry averages despite trending lower from 21.3% (’13) to 18.7% (’22) with a last-5-year mean of 19.8%. ROE is greater than peer and industry averages while increasing from 25.1% (’13) to 39.7% (’22) with a last-5-year mean of 43.3%. Debt-to-Capital is also greater than peer and industry averages while trending higher from 25.7% (’13) to 53.4% (’22) with a last-5-year mean of 59.4%.
Interest Coverage is currently NMF as a result of negative TTM EPS. Quick Ratio is 0.85. M* gives a Standard rating for Capital Allocation and Value Line gives an A rating for Financial Strength.
With regard to ongoing litigation risk, M* writes:
> Nothing in the settlement or the proposed payment schedule
> materially alters our prior view, as we were only off our most
> recent estimate by about $400 million (and time value of money
> more than made up the difference). After truing up its latest
> liabilities, we come away more confident in 3M’s liquidity
> position to fund the dividend, though we expect it will have
> to take about $2.5 billion in additional debt over the next
> couple of years. Apart from the $10 billion-plus liability
> booked related to PFAS and municipal drinking water and the
> more recent Combat Arms [military] earplug settlement, we
> think 3M will be on the hook for approximately $9 billion
> more in PFAS-related legal liabilities.
M* assigns a wide/stable economic moat to the company, but 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 7.0% YOY and 1.9% per year for ’23 and ’22-’24 (based on 16 analysts).
- Zacks projects YOY 7.4% contraction and 2.6% growth for ’23 and ’24, respectively (4 analysts).
- Value Line projects 2.5% annualized growth from ’22-’27.
- CFRA projects contraction of 2.8% YOY and flat for ’23 and ’22-’24, respectively.
- M* gives a 2-year ACE of 1.5% contraction per year and projects 2.5% annualized growth x10 years in its analyst note.
I am forecasting below the long-term estimates at 1.0% per year.
With regard to EPS growth:
- CNN Business projects contraction of 14.8% YOY and 2.4% per year for ’23 and ’22-’24, respectively (based on 16 analysts), along with 5-year annualized growth of 6.3%.
- MarketWatch projects contraction of 2.1% and 1.0% growth per year for ’22-’24 and ’22-’25, respectively (20 analysts).
- Nasdaq.com projects growth of 8.8% YOY and 8.7% per year for ’24 and ’23-’25 (6/6/3 analysts for ’23/’24/’25).
- Seeking Alpha projects 4-year annualized growth of 4.0%.
- Zacks projects YOY 11.4% contraction and 8.8% growth for ’23 and ’24, respectively (6), along with 5-year annualized growth of 7.2%.
- Value Line projects 4.2% annualized growth from ’22-’27.
- CFRA projects contraction of 14.3% YOY and 4.3% per year for ’23 and ’22-’24.
- M* projects long-term annualized growth of 2.7%.
The mean of five long-term estimates is 4.9% per year. I am forecasting below the range at 1.0% per year. I could forecast 2.0% and still be below the range, but due to uncertainty over how the 2023 Q2 [litigation] loss will affect the annual number, I remain ultra-conservative. I will use trendline EPS of $10.05/share as the initial value (slightly less than ’22 EPS of $10.18).
My Forecast High P/E is 18.0. Over the past decade, high P/E ranges from 17.9 in ’22 to 30.8 in ’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 7.0. Over the past decade, low P/E ranges from 10.5 in ’22 to 21.9 in ’17 with a last-5-year mean of 15.6. I am forecasting well below the entire range.
My Low Stock Price Forecast (LSPF) of $70.40 is default based on $10.05/share initial value. This is 24.8% less than the previous closing price and 23.8% less than the 52-week (and 10-year) low.
Over the past decade, Payout Ratio has increased from 37.8% (’13) to 58.5% (’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 4.1. Total Annualized Return (TAR) is 17.3%.
PAR (using Forecast Average—not High—P/E) is decent for a large-sized company at 10.1%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR, which is much better.
To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 93 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 2.4%, 3.8%, 20.9, 14.6, and 60.0%, respectively. I am lower across the board. Value Line projects an average annual P/E of 14.0, which is lower than MS (17.8) and higher than mine (12.5).
MS high / low EPS are $11.78 / $7.04 versus my $10.56 / $10.05 (per share). With regard to low EPS, MS would be a 9-year low for the company. This almost seems unreasonable but as mentioned above, we don’t know how the Q2 loss will affect the full year. I also see a slew of studies using -$2.84/share for low EPS. That number is nowhere in the 2023 Q2 10-Q, and it doesn’t make sense to me to use a negative number anyway [I would exclude as a nonrecurring event to get +$2.17/share ($8.68 annualized) per Value Line]. I did not lowball the low EPS but I did lower forecast growth rate by 1.0%. With regard to high EPS, Value Line projects $12.50/share. I am lowest of the three.
MS LSPF of $96.50 implies a Forecast Low P/E of 13.7: less than the above-stated 14.6. MS LSPF is invalid on today’s date, however. My LSPF is 27.1% lower, which is much more conservative. Interesting to see MS low EPS so much less than mine given a LSPF so much greater.
My TAR (over 15.0% preferred) is less than the 21.5% from MS. MOS seems robust in the current study.
I track a few different [usually conflicting] valuation metrics. PEG is 1.5 per Zacks, which is fairly valued. Relative Value [(current P/E) / 5-year-mean average P/E] cannot be calculated due to negative quarterly EPS. Kim Butcher’s “quick and dirty DCF” prices the stock at 12.0 * [$16.10 – ($6.75 + $3.00)] = $76.20, which suggests the stock to be 18.6% overvalued.
Based on what I consider to be a very conservative stock study, MMM is a BUY under $100/share.
This is my fifth First Cut done on MMM as I remain fascinated despite massive shortcomings: this is not a [high] quality company, growth is anemic, and litigation risk is very high.
Despite all this and a rating of HOLD, CFRA has a 12-month price target of $120: 13x projected 2024 EPS, which is down from the last-5-year-mean forward P/E of 16.7. This represents annual price appreciation of 28.2% and does not include the dividend yield of roughly 6%.
Maybe that’s reason to find some appeal to this stock?