The Morning Monte


3M CO (MMM) Thursday, July 23, 2015

Published: 8/4/2015 10:10:00 AM UTC

3M (NYSE: MMM) reported mixed Q2 2015 earnings on July 23.  EPS of $2.02 was 1% above consensus, while revenue of $7.7 billion fell short of analyst estimated $7.83 billion.  A strong dollar reduced sales 7.3% year-over-year, wiping out the 1.8% organic local currency growth.  Operating margin improved despite these difficulties.

Prudena's models indicate that MMM shares are very slightly overvalued, though the current share price falls well within a reasonable range around the most likely value.  The largest problem facing 3M is the dollar charge, which is a temporary headwind even though it may continue in coming periods.  Overall, the company has strong prospects for stability, though investors have no reason to expect rapid growth or above-market price appreciation.

Value Breakdown

Assuming 8% required rate of return, 3M's current market price of $151.57 implies 3.01% long term residual earnings growth.  This figure is supported by relatively high ROE and dividend payout ratio.  Prudena's residual earnings model takes consensus earnings estimates and 5 year growth forecasts as inputs and assumes long term dividend growth in excess of 5%.  Under these conditions, long term residual earnings growth is estimated at 3.0%.  The residual earnings model estimates value per share of $140.08, 7.6% below the current market price.  A Monte Carlo simulation which accounts for input uncertainty in a residual earnings model returns a distribution of possible values ranging from $135 to $164, with a most likely predicted value of $147.64.  Prudena's models indicate that the current market price is reasonable, though slightly over valued.

Value Probability Distribution

Conclusions ...

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NOTE: The Morning Monte is high-level, and any investment requires a deeper analysis than is presented here. The comments in the Morning Monte are intended to help guide your research and ground you in the fundamentals of the company. In no way should the comments in The Morning Monte be taken as advice to buy or sell a particular equity. Some of the statements are forward looking. As such, these statements are speculation--so beware! The comments represent the views of the author and are not necessarily the views of PRUDENA™.

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About 3M CO

3M Company (NYSE: MMM) is a global diversified goods provider serving a wide range of markets including automotive, electronics and energy, appliances, paper and printing, packaging, food and beverages, construction, clinics and hospitals, pharmaceutical, and consumer and office retail.  3M has 27 business units that operate through five segments: Industrial, Safety and Graphics, Electronics and Energy, Healthcare and Consumer.  The Industrial segment serves  a broad range of markets, and its main products include tapes, abrasives, adhesives, ceramics, specialty materials, filtration products, automotive components and detailing products. The Safety and Graphics segment offers safety, security and productivity items including personal protection, traffic safety and security products. Graphics include floor matting and roofing granules. The Electronics and Energy segment manufactures and markets optical films, packaging and interconnect devices, insulation for electronics, renewable energy components, touch screens, monitors and infrastructure protection products.  The Healthcare segment provides medical and surgical supplies, skin products, drug delivery systems, dental systems and food safety systems. Consumer products include sponges, scouring pads, cloths, tapes, indexing systems and home improvement.

3M's net sales of the company totaled $31.821 billion during 2014, a 3.1% year-over-year increase.  US sales contributed 36.8% of total revenue during the period. During 2014, Industrial revenue generated 34.5% of  total revenue, while Safety and Graphics, Electronics and Energy, Healthcare and Consumer segments contributed 18%, 17.6%, 17.5% and 14.2% of the revenue respectively.. 3M operates in 30 U.S. states, 70 countries and has 46 technology platforms.  3M Company was founded in 1902 and is headquartered in St. Paul, Minnesota.