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3M Still No Bargain Even After $60 Stock Drop

Tuesday, May 1st, 2018

Recently, I wrote a post on our social media pages about the earnings release for McDonald’s and who eats there. I mentioned if you liked the food ok, but don’t buy the stock because it’s too expensive. These comments received many replies, but I thought it was interesting how many people couldn’t grasp why the stock was too expensive to purchase.

Today, I decided to write about another company I was hoped wasn’t too expensive. After trading as high as $260 it is now around $194/share, that company is 3M. Now you may be wondering what this company has in common with McDonalds and the commonality is the high valuations. Going back over 100 years’, time and time again it has been proven investors don’t do well long term by over paying for any investment. It is important for investors to understand what they pay for the earnings, past and future, the sales of a company along with the book value and cash flow.

3M is one of the most diversified product companies I can think of, they make everything from office paper products to roof shingles to surgical equipment and so much more. The company employs over 90,000 people and is headquartered in St Paul-Minneapolis. I was disappointed to see a PE ratio of 24.3, which is higher than the industry at 22.8. Price to sales were even more expensive at 3.6, which is three times the industry of 1.1. The company has acquired many companies over the years which has built the goodwill up to over $13 billion and now exceeds the equity of $11 billion. This is not something I like to see. Last year the company produced over $6 billion in cash flow, something I love to see however investors will pay up for that cash flow at 21.4 well above the industry average of 12.8.

The company’s dividend is not too bad, but at 2.8% and using only 43% of the earnings to pay the dividend, an investor would have to agree it is a reasonable dividend.

Sales are up nicely at 6.1% year over year not quite as good as the industry growth of 7.7%, but close enough. Earnings per share for the same period fell 3.4% for the company and 11.2% for the industry. This doesn’t look right to me, could be some accounting issues from the tax law or something else but if I owned this company I would want to understand why earnings per share are falling while sales are growing.

Next, we come to the financial strength of the company and darn, I was disappointed here. Liquidity of the company looks ok with a current ratio of 1.7, which is not as good as the industry at 2.3, but still acceptable. The debt to equity at 142 is well above the industry at 100. I’m just not happy with debt levels that high along with the high intangibles, it makes me uneasy.

Two positives for the company include a return on equity of 44% well above the industry at 15% and net profit margin also looks good at 15.2% as it is three times the industry average of 4.8%.

The company has a forward PE of 17.1 which is about the long-term average, but definitely no bargain. I don’t know about you, but I like to buy things on sale and investors are paying full price for 3M even with the $60 pullback in the stock price. December 2019 EPS of $11.34 tells me this company is worth about $187 per share. As you can see the stock price is still higher than that even with the $60 pull back.

I think this company is too over valued to hold and should be sold at these levels. I would not want to invest in this company unless it fell another $60 and then it would trade at an attractive 12 times forward earnings. That is when it would be on sale and when I would become interested in investing in 3M.

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