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3M: Surviving Difficult Times

03/18/2020 5:00 am EST

Focus: INDUSTRIALS

Hilary Kramer

Editor, GameChangers

The key to surviving this difficult time is to have companies with strong balance sheets, consistent free cash flows and strong franchises with customers that can get by the current difficulties, asserts Hilary Kramer, editor of the industry-leading advisory service, Value Authority.

I believe the companies in our model portfolio meet these criteria. Even though all of them have taken a hit, I expect a strong recovery in their price between now and the year’s end.

3M (MMM) is a company that has traditionally been admired and sold at a premium multiple when compared to other industrial stocks.

A strong and diversified portfolio of businesses, below-average exposure to the economic cycle, high returns on capital and a high level of free cash flow as a percentage of net income has made it very admired by investors. Thus, it has always been on my watch list for potential Value Authority names.

As recently as April of last year, just before first-quarter earnings were released, the stock traded at a neat $220 a share. This was over 20X earnings per share (EPS) that were expected at the time. However, MMM’s first-quarter results were disappointing, and it has almost been straight downward for the stock since.

The most recent disappointments completed a five-year period for 3M, which showed little growth in revenue and operating income, with EPS rising only due to share buybacks and the tax legislation in 2017. And there is little evidence, for now, that there is going to be a significant turnaround soon.

However, with the stock under $150, or just 16X this year’s expected EPS with a 3.8% dividend yield, I thought that the stock was just too cheap to pass up. I also want to give CEO Mike Roman’s plans to rejuvenate growth and profitability a chance.

Mr. Roman, who has only been CEO since July 2018, is reorganizing the company by cutting five divisions to four through merging 3M’s transportation and electronics divisions. He also has shifted products between divisions to better align the company’s products to its target customers. As part of the reorganization, the company cut 1,500 jobs.

I believe we will also see 3M make more acquisitions than they have in the past. In May of last year, the company agreed to acquire medical products maker Acelity for $4.4 billion and the assumption of $2.3 billion in debt. The deal, which was the largest in the company’s history, fits in well with the company’s plans to grow its advanced wound care business.

In this era of very low interest rates where a company of 3M’s financial strength could be selling for multiples much higher than historical averages, it is a very undervalued company with a dividend yield of around 4%. 3M is a "buy" under $150. My target is $180.

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