Good Returns Should Stick to 3M

09/20/2007 12:00 am EST

Focus: STOCKS

Jon Markman

Editor, Trader's Advantage

Jon Markman, editor of Jon Markman’s Strategic Advantage, says the global industrial giant should do well in the market rally spurred by the Fed’s rate cut.

Despite turmoil in the broad market and uncertain prospects from its customers in the construction business, industrial giant 3M (NYSE: MMM) has ever so quietly edged back up near its all-time high.

This maker of everything from Post-It Notes and Scotch tape to flat-screen computer displays and industrial solvents appears to be one of the few companies that both bulls and bears can sort of agree upon.

The good news is that their portfolio of business is remarkably diverse. Currently, 3M serves its customers through six business segments: Consumer and Office, Display and Graphics, Electro and Communications, Healthcare, Industrial and Transportation, and Safety, Security and Protection Services. This variety of business allows 3M to roll in some nice profits—in 2006, the company had $22.9 billion in worldwide sales, with almost two-thirds coming from outside of the United States.

While the Industrial and Transportation business hauls in the biggest chunk of sales—$6.7 million in 2006—3M's key housing-related units that produce roofing and construction adhesives are flat-to-down this year, and they look likely to remain so. But when one side of [3M’s] business is struggling a little, the other segments pick up the slack.

Its [thriving] technology business is being driven by the demand for its Vikuiti Display Enhancement Films, which make the screens on LCD TVs, laptop computers, mobile phones, portable music players, and other electronic devices brighter. Comparable companies in the display business are also doing well—news that bodes well for 3M because it means that demand is strong. But the good news for 3M is that panel prices have reportedly been on the rise by as much as $5 over last year for large panels, or ones over 42 inches.

Meanwhile in the Consumer and Office Business segment, back-to-school sales for the company have been tolerable, if not actually robust. Consumers appear to be borrowing a little more on their credit cards [rather than] borrow on their homes anymore, but most economists do not believe that this is getting out of hand.

This is not an area that investors should be worrying about, even with lower expectations for consumer spending this year, because the forecast for 3M business in this area is only for a modest 3% gain, so that is a low hurdle to overcome. In the office retail segment, 3M officials have said that they expect around 10% growth as large customers have not slowed their orders.

Moreover, 3M’s valuation looks fairly sweet, with a price/earnings multiple of 18x consensus estimates, well below the historical median.

All in all, this [is a good stock to own in the lively market rally following the Federal Reserve’s interest rate cut]. The stock could rise to $100 over the next six to 12 months, offering a total return of over 10% without much risk.

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