3M stock analysis

3M Stock Analysis – It is About You, Not 3M

You can write a book about investing in 3M stock (stock MMM), the great business it is, the 118,000 patents it has, the PFAS legal liability issues it has, the fact it has been paying a growing dividend for 61 years and many other things.

Here is the 3M stock analysis video:

3M Stock Analysis Video

Then, you can write another book about how the market perceives 3M, what will be the valuation, is the stock oversold, undervalued, what will the upcoming quarters look like etc.

But investing is not about getting too much information, investing is about focusing on the most important piece of information and then acting on it. Investing is about making things simple which is often the hardest thing to do.

The most important piece of information regarding investing in 3M stock is not related to 3M, 3M is 3M and there is nothing we can do that will change that. The most important thing it is related to how 3M as a business fits in your portfolio, nothing else.

I’ll explain my statement by discussing 3M’s compounding history, categorizing it as a stock, confirming it is a great business and concluding by showing how it all boils down to how much you are willing to pay for a great business like 3M.

3M stock is a compounding machine

Over the last 30 years, the stock delivered nice returns to shareholders, approximately 7% per year not including the dividend.

3M stock price
3M stock price

Such a nice compounding rate over a long period tells me that the business has a moat, can scale, grow and do that with a healthy return on capital. What else would you wish for as an investor?

However, things always change and 3M has reached a kind of maturity.

3M stock categorization

I recently summarized what is probably the most important chapter of Peter Lynch’s book One up on Wall Street where he shares the six stock categories that helped him find the best investments.

3M stock categorization
3M stock categorization

Given the current situation with 3M, if can be categorized as a slow grower. Revenues grew just 2% per year over the last decade and it is unlikely to expect much stronger growth in the future.

3M stock fundamentals
3M stock fundamentals – 3M stock dividend

3M stock fundamentals – Source: Morningstar MMM Quote

However, its business is great, enjoys wonderful margins, is well diversified amidst cyclical and non-cyclical sectors and the returns on capital have been extremely healthy in the past and are likely to continue being like that in the future.

The last two recessions didn’t affect it more than what was just a temporary dip in earnings and it is likely the next recession will have a similar effect.

3M stock Annual report
3M stock Annual report

Source: 3M’s 2004 and 2010 annual reports

The current earnings are $8 per share and we can expect those to grow at mid-single digit rates in the future with the inevitable recession dips.

Given it is a great business with stable future cash flows but no crazy surprises on the upside, it all boils down to how much you are willing to pay for owning MMM.

3M stock valuation – how much are you willing to pay?

The current market capitalization is $88 billion while earnings are $4.5 billion. This gives a PE ratio of 19.5, let’s round it up to 20. How much are you willing to pay to own 3M?

If you are happy with a return of 9% per year, assuming 4% earnings growth and the current earnings yield of 5%, then the current stock price is a good one for you.

On a market capitalization of $60 billion, that could be reached if this coronavirus leads to a full blow global recession, we would have a 7.5% earnings return, add 4% long-term earnings growth and you are at a nice return of 11.5% per year.

On a market capitalization of $120 billion, we would have a 3.75% earnings return, add 4% long-term earnings growth and you are at 7.75% per year. This is still an amazing return when compared to current interest rates and the market might be willing to easily pay that in the future. If, but most probably when that happens again, you are looking at a 36% return from the stock at current levels. But that is speculation, not investing. However, it is always tempting to speculate given the market capitalization was above $150 billion not that long ago.

3M stock - market capitalization
3M stock – market capitalization

I believe it is best to be an investor, buy 3M when you like the return, and the if the speculative market gives you returns that are better than what you expected, take advantage of it.

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