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-March 17, 2008 -Marc Dessel

3M. -March 17, 2008 -Marc Dessel. General info. Ticker: MMM Conglomerate Large Cap Five-star Morningstar Rating Named 19 th most admired U.S. company by Fortune Magazine. Many positives. International exposure Terrific product mix, innovation Positioned well in economy

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-March 17, 2008 -Marc Dessel

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  1. 3M -March 17, 2008 -Marc Dessel

  2. General info • Ticker: MMM • Conglomerate • Large Cap • Five-star Morningstar Rating • Named 19th most admired U.S. company by Fortune Magazine

  3. Many positives • International exposure • Terrific product mix, innovation • Positioned well in economy • Largest segments-industrial, health care • Strong financial performance • Stock is undervalued

  4. Major segments • 6 segments • 2006 Revenues • Industrial and transport 29.0% • Health Care 17.5% • Display and Graphics 16.4% • Consumer & Office 13.8% • Safety, security, protection services 11.6% • Electronics and Communications 11.5% • Other 0.2%

  5. Products • Industrial and transport – abrasives, adhesives, tapes, coatings, wiring, products to maintain military vehicles, products that can withstand high water pressure when drilling for oil • Health Care – surgical supplies, infection prevention products, dental product • Display and Graphics – optical film for LCD televisions and touch screens, computer screen filters • Consumer & Office – stationary, consumer health products • Safety, security, protection services – protective glasses, energy control products, roofing granules for asphalt shingles, protective gear for emergency responders • Electronics and Communications – display tapes, high-performance fluids, wire connectors, circuits for ink-jet printers and cell phones

  6. 3M’s Brands • Post-it notes • Nexcare bandages • Scotch tape • Command • Products in specialty stores, wholesalers

  7. Distribution channels • Directly -169 sales offices worldwide • Indirectly -Retailers, wholesalers, specialty stores

  8. International presence • 2006 fiscal year revenue breakdown • United States 38.6% • Asia/Pacific 27.3% • Europe, Middle East, Africa 25.0% • Latin America 9.1% • By 2011, Morningstar estimates over 65% of revenues will be international • Highest margins in Asia and Latin America

  9. Competitors • Avery Dennison Corporation • DuPont • Johnson & Johnson • Honeywell International • Tyco • Eastman Kodak • Corning • International Paper

  10. SWOT Analysis • Strengths • Strong research and development -Morningstar estimates over next 5 years, 6-7% of revenues spent on R&D, same as previous years -Less cycle time – competitive advantage • Diversified portfolio-products and geography 19 acquisitions in 2006 • Strong financial performance

  11. Company Fundamentals

  12. Forward Valuation Analysis

  13. Time series analysis 2003 2004 2005 2006 2007 • Earnings per share 3.02 3.75 4.12 5.06 5.60 • Dividends per share 1.32 1.44 1.68 1.84 1.92 • ROE % 34.6 32.7 31.2 38.4 37.7 • ROA % 14.6 15.6 15.5 18.4 17.8 • Gross margin % 49.1 50.2 51.0 48.9 47.9 • Debt/equity 0.22 0.07 0.13 0.11 0.34 • Asset Turnover 1.11 1.04 1.03 1.10 1.06 • P/E 28.2 21.9 18.6 15.4 14.1

  14. Weaknesses • Poor inventory management Inventory turnover - 4.67 Industry average - 8.32 • Increasing costs to health care segment -Restructuring – sold personal care unit, branded pharmaceuticals unit, severance pay

  15. Opportunities • Growing demand for LCD’s – optical films • Rising health care spending in U.S. • Global expansion – 19 new or expanding manufacturing plants – China, Mexico, Poland, South Korea, India, Russia -To shorten supply chain – only 35% of manufacturing is outside U.S. while 60% of revenues outside.

  16. Threats • Growth in private labels • Global economic slowdown • Exchange rate fluctuations

  17. Undervalued • Current price:$77.53 • Beta 0.82 • 52-week range $72.05 – $97.00 • Morning Star fair value $97.00 • Yahoo 1-year target estimate $94.18 • 2-stage DDM model – intrinsic value $87.94 Margin of safety 15% –$74.75 – $101.13 -outside estimate of growth – 10.7% -payout ratio – 34.3% -discount rate – 7.82% -high growth rate – 13.30% -stable growth rate – 6%

  18. One-year chart

  19. Two-year chart

  20. Insider Activity • According to Morningstar website, executives have been purchasing the stock • Nov 12 – 9 Directors purchased shares at $93.58 • Feb 11 – 4 Directors purchased shares at $85.09 • March 3 – 3 Executive VP’s purchased 25,481 shares each at $78.49.

  21. Competitive advantages • Innovative – organic and inorganic growth • Manufacturing capability • Distribution network • Strong margins

  22. Recent developments • 2007 Fourth quarter earnings in line with expectations – -$1.19 per share, market expected $1.17, Health care and safety and security experienced highest growth -Internal growth – 5% during 2007 -U.S. growth only - 1.6% during 2007 • Feb 11 – Declared a 50 cent per share dividend for first quarter 2008. 4.2% greater than dividend for first quarter of 2007. 366th consecutive quarterly dividend and 50th consecutive year of at least one dividend increase • March 4 - Acquired Hitech Polymers Inc. The company makes specialty thermoplastic polymers that are used to manufacture plastic bottles, molded parts, valves, and pumps for construction and transportation

  23. Recommendation • Purchase 50 shares • Approximately, $3900 -Increase diversification to portfolio -Larger weights in industrial, health care areas (top-down analysis) -Undervalued -Innovative company – organic (5% for 2007) and inorganic growth (19 acquisitions in 2006) -Strong financial performance

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