Filed Under: ,
Tickers in this Article: MMM, GE, BA
If you didn't buy 3M (NYSE:MMM) shares a year ago, you're in luck; you can buy them now for roughly the same price that they were back then. The recent sell-off in the stock could have created a bargain opportunity, and there are a number of facts to support that view. Read on as we examine how 3M's tight-fisted ways will serve it well in the coming months.

A Tight Ship Is A Profitable Ship
Often compared to General Electric (NYSE:GE), 3M has managed to outperform its larger rival in terms of sales and earnings-per-share (EPS) growth over the last five years.

At over 17% per year, 3M's EPS growth has been more than double the 8% annual rate of growth in sales over the period. Getting double the earnings bang from fewer dollars of sales growth is a credit to the company's commitment to cost control, a practice which it acquired, somewhat ironically, when former GE alumnus James McNerney jumped ship to take the helm at 3M between 2001 and 2005. McNerney has since moved on to the top spot at Boeing (NYSE:BA), but his tight-ship policies still hold sway in the executive suite at 3M. That's not a bad thing when facing the prospect of economic slowdown or recession. (To learn more about 3M, GE and other massive companies with tiny names, see Conglomerates: Cash Cows Or Corporate Chaos?)

Overseas Bounty
While the company's recent fourth quarter EPS result of $1.17 per share was bang on with the consensus estimate, Reuters reported that 3M warned that first-quarter financial comparisons with a year earlier would be "a little challenging". That could be interpreted as a reference to slower growth prospects in the U.S., but with 63% of 3M's of sales now coming from overseas, the company is well-positioned to ride out a slow-down in the domestic economy.

Based on Historic P/E, We Have a Bargain
The sharp drop in share price from the October high of $97 to the current $78 level is an indication that a sizable slowdown in growth has already been discounted into the current share price. Based on this year's consensus expected EPS of $5.44, the shares now trade at a forward price-to-earnings multiple of around 14-times; this is at the low end of its historical 14-to-30-times range. The shares also offer a dividend yield of about 2.5%, which is in line with the yield offered by the overall market as measured by the S&P 500 stock index. (To begin with the basics, read P/E Ratio: Using The P/E Ratio.)

The Bottom Line
Management's warning to expect a weak current quarter is worth noting, but with over 50,000 products in its portfolio and two thirds of its sales from overseas, 3M is sufficiently diversified to weather any downturn in the U.S. economy. Especially since the possibility of the downturn has been largely discounted into the current share price.

To learn how add some of 3M's frugality to your own life, check out Save Money The Scottish Way.

comments powered by Disqus

Trading Center