Why Wall Street Is Bullish on 3M
The diversified company is well-positioned for the long-term.
Solid growth, low debt, and the prospect of strong earnings make 3M (MMM) an attractive long-term stock, analysts say.
Continued innovation and expansion overseas, especially in Asia, are expected to boost earnings as the worldwide economy recovers in 2010.
At least three Wall Street analysts offered positive views of 3M today:
- Citigroup upgraded the stock to "buy" from "hold" and raised its 2011 price target to $92 from $84 a share.
- Standard & Poor's restated its "buy" recommendation on the stock and set a 12-month price target of $85 a share.
- FBR Capital Markets restated its "outperform" rating and raised its price target to $100 from $98 a share.
The upbeat views sent 3M's stock to a 52-week high. In mid-morning trading Wednesday, 3M's stock gained $2.27, or 2.95%, to $79.38. The 52-week range is $40.87 to $79.25 a share.
3M issued an updated outlook yesterday. It expects 2009's earnings to total $4.50 to $4.55 a share excluding one-time items, below the consensus estimate of $4.57. For 2010, the company expects to earn $4.85 to $5 a share. Analysts looked for earnings of $4.94.
"We all know we're going through some transitions in the economy, and forecasting is very, very difficult," George Buckley, 3M's chief executive officer told investors at the company's year-end outlook conference in Chicago. He said continued high unemployment, now at 10%, will make it difficult for companies that make consumer products.
But analysts believe 3M will prosper because it generates the majority of its income from foreign markets, including China. It's also moving aggressively into new, high-growth markets, including lithium batteries for hybrid and electric cars.
3M is active in six major sectors: Industrial and transportation; health care; display and graphics; consumer and office; electro and communications; and safety, security, and protective services. The company's products include Post-It Notes, Flex Circuits, Scotch Tape, Thinsulate, and Nexcare bandages, as well as abrasives, specialty chemicals, fiber optic connectors, and drug delivery systems.
"3M generates 65% of sales outside the US with about 30% in emerging economies," Jeffrey T. Sprague, an analyst at Citigroup, says in a research report. "In addition to rapid emerging economy growth, 3M is still under-penetrated in developed economies versus the US. 3M is targeting long-term organic growth of 7% to 8%, which is looking more credible based on geographic mix and successful efforts to expand the scope of its served markets."
Citigroup raised its 2010 earnings estimate to $5.15 a share compared with company guidance of $4.85 to $5. Sprague believes 3M's internal growth can match or beat that of competitors Roper Industries (ROP) and Danaher Corp. (DHR).
S&P cited restructuring costs as the basis for its more conservative earnings estimate, but remained bullish on the stock.
We are reducing our earnings per share estimate to reflect 3M's new guidance practice of including restructuring costs, and we reduce our 2009 EPS estimate by $0.24 to $4.36 and 2010's by $0.10 to $4.89. Despite the change, we find positive 3M's 2010 guidance, noting it was better than our previous estimate, without restructuring costs. We continue to find favorable 3M's early-cycle and diverse business model along with its strong balance sheet. Although we reduce our target price $1 to $85 on lower estimates, we continue to find the shares attractive at 18 times our 2010 EPS estimate.
S&P believes the stock comes with low risk, citing the company's strong balance sheet, low debt, and strong free cash flow that's averaged about 95% of net income for the last 10 years.
FBR Capital Markets says 3M's "research and development-fueled growth engine is back on track."
"3M has earned its place as one of the elite-multi-industry primes based on its sector-best profitability, defensive mix, and healthy balance sheet," analyst Deane M. Dray says in a research report. "With about 75% of revenues from short-cycle/consumables, 3M appears well positioned to benefit early in a macroenomic recovery."
The company expects revenue from current operations to increase 5% to 7% in 2010 after declining about 9% in 2009. Historically, the company has been closer to 4%. Long-term, the company looks for growth of 7% to 8%.
"Our positive investment thesis remains intact with 3M optimally positioned as a defensive early-cycle, with the sector-high 65% of international revenues," the FBR Capital Markets analyst says.
Adam Fleck, an analyst at Morningstar, says 3M had $3.2 billion in cash at the end of the third quarter. He expects the company to look for acquisitions in China, and markets such as health care, renewable energy and the automobile aftermarket.
Here at Minyanville, Professor Glenn Curtis offers Three Reasons to Take Note of 3M.
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