MMM Stock Study (4-4-23)

I recently did a stock study on 3M Co. (MMM) with a closing price of $104.57.

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 last decade, this large-sized 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 at a 10-year low. Per visual inspection, this is not a high-quality growth stock.

PTPM is greater than peer and industry averages. It increased from 21.3% in ’13 to 23.8% in ’17 before reversing to 18.7% in ’22. The last-5-year average is 19.8%.

ROE is greater than peer and industry averages. It increased from 25.1% in ’13 to 40% in ’22 with a last-5-year average of 43.4%. Unfortunately, Debt-to-Capital is also greater than peer and industry averages. This has trended higher over the last 10 years and has a last-5-year average of 59.4%. Interest Coverage is 14 and Quick Ratio is 0.9. 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. M* assumes total liability of $18B. Value Line estimates liability at $1.00/share but wonders whether this is enough.

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.”

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

• CNN Business projects contraction of 7% YOY and 2.1% per year for ’23 and ’22-’24 (based on 17 analysts).
• YF projects YOY 6.8% contraction and 3.3% growth for ’23 and ’24, respectively (19 analysts).
• Zacks projects YOY 6.9% contraction and 1.8% growth for ’23 and ’24, respectively (4).
• Value Line projects 3.2% annualized growth from ’22-’27.
• CFRA projects 2.9% YOY contraction and zero growth per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 1.8% contraction per year along with its own analyst forecast of 2% annualized growth over the next 5 years.

I am forecasting below both long-term estimates.

I forecast long-term annualized EPS growth of 0% based on the following:

• CNN Business projects contraction of 14.4% YOY and 2.7% per year for ’23 and ’22-’24, respectively (based on 17 analysts), along with 5-year annualized contraction of 0.5%.
• MarketWatch projects annualized contraction of 3% and 0% for ’22-’24 and ’22-’25, respectively (21 analysts).
• Nasdaq.com projects 6.7% YOY growth and 6.3% annualized growth for ’24 and ’23-’25 (6, 5, and 3 analysts for ’23, ’24, and ’25, respectively).
• Seeking Alpha projects 4-year annualized contraction of 1.3%.
• YF projects YOY 14.5% contraction and 10.1% growth for ’23 and ’24, respectively (20), along with 5-year annualized growth of 0.1%.
• Zacks projects YOY 14.4% contraction and 6.7% 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 17.3% YOY and 4.6% per year for ’23 and ’22-’24.
• M* projects long-term annualized growth of 3%.

The mean of six long-term estimates is 2.5% growth per year. I am forecasting toward the bottom of the range.

My Forecast High P/E is 18. Over the last 10 years, high P/E has ranged from 17.9 (’22) to 30.8 (’17) with a last-5-year average of 23.1. I am forecasting near the bottom of the range (only ’22 is lower).

My Forecast Low P/E is 9. Over the last 10 years, low P/E has ranged from 10.5 (’17) to 21.9 (’22) with a last-5-year average of 15.6. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) is $83.30. Given a 0% EPS growth rate, I am using ’20 EPS of $9.25/share (rather than $10.18 from ’22). This is 20.3% less than the previous closing price and 16.9% less than the 52-week low.

Over the last 10 years, Payout Ratio has increased from 37.8% in ’13 to 58.5% in ’22 with a last-5-year average of 63.1%. I am forecasting below the entire range at 37%.

These inputs land MMM in the BUY zone with an U/D ratio of 3.7. The Total Annualized Return (TAR) is 13.9%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-sized company at 8.4%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on total annualized return (13.9%) instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 158 studies done in the past 90 days (67 outlier studies and my own excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 2.6%, 4.0%, 20.0, 15.3, and 60%. I am significantly lower across the board. Value Line projects a future average annual P/E of 16.0: lower than MS 18.1 and higher than my 13.5.

With regard to other data, MS high and low EPS are $12.37 and $9.71 compared to my $10.18 and $9.25. MS has a LSPF of $107.10, which is higher than the last closing price. MMM is down ~15% over the last 2-3 months, which hopefully explains this. Per usual, this does not align with the default LSPF of 15.3 * $9.71 = $148.56.

The litigation risk offsets what I perceive to be a robust MOS in this study. While MMM is a BUY under $108/share, maybe I knock another 5-10% off and look to buy under $102 or $97 in case the legal tab ends up higher than anticipated.