A Quality Investment in Innovation & Diversification

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you are looking for a quality long-term investment, you have come to the right place. Prior to getting to the details, however, it should be noted that based on this company’s broad exposure, any global economic downturns will have an impact on the stock price.

The good news is that any downswings in the stock price should act as an opportunity to add to your position. Furthermore, while the following company does not fit in the resilient category, it is likely to hold up better than most stocks throughout the broader market.

With that out of the way, the following company is very attractive, mostly thanks to superb innovation and diversification.

The reveal

The company being referred to is 3M (NYSE: MMM), which has a market cap of around $81 billion. It also sports an impressive net margin of 14.79% and ROE of 25.82%. However, those numbers do not mean much without understanding the company.

3M is involved in almost any business you can think of, with exposure to industrials, health care, consumer products, security, graphics, communications, and more. 3M is a bottom-line-focused company that effectively keeps costs low. And even with cost-cutting measures, growth has been strong.

In the second quarter, 3M saw growth in most businesses. It also saw overall EPS growth of 2.6% over last year. Furthermore, 3M is opening new facilities in Asia and Latin America as it anticipates continued growth in these markets.

Below is an example of 3M’s innovative capabilities. A few of the company’s most popular products include its 3M Particulate Respirator (Safety segment) and 3M Mobile Projector (Home & Office segment). 

3M expects EPS of $6.60 to $6.85. It also plans on repurchasing $3.5 billion to $4.5 billion worth of shares, versus a prior expectation of $2 billion to $3 billion. Additionally, 3M currently yields 2.10%. Needless to say, 3M is a well-managed company with solid future prospects.

Related option

United Technologies (NYSE: UTX) is another impressive company, with a market cap near $97 billion. Unlike 3M, United Technologies saw revenue decline in 2012. Revenue still has not topped its 2008 level, which 3M surpassed back in 2010. However, United Technologies has seen steady bottom-line improvements over the past three years.

United Technologies is highly focused on shareholders, which qualifies it as an immediate consideration for long-term investors. United Technologies has also displayed quality debt management, sporting a debt-to-equity ratio of 0.76. Therefore, capital should continue to flow to shareholders for the foreseeable future, and innovation and acquisition opportunities are present. 

Currently, United Technologies yields 2%. And cash flow from operations has been trending higher, as it improved from $5.9 billion in 2008 to $6.6 billion in 2012. 

In regards to geographic exposure and diversification, it does not get much better. The majority of UTX's business is done in the United States (40%), followed by Europe (26%), Asia Pacific (20%), and Other (14%). 

When it comes to product diversification through a variety of industries, the below numbers are telling:

UTC Climate, Controls & Security: $17.1 billion

Pratt & Whitney: $14 billion

Otis: $12.1 billion

UTC Aerospace Systems: $8.3 billion Sikorsky: $6.8 billion

United Technologies is currently trading at 15 times earnings, making this an entry point to consider. Consider scaling into the position in order to save available capital in the event of a pullback.

The behemoth

General Electric (NYSE: GE) is the largest company of the three, with a market cap of $247 billion. It is also one of the most innovative companies on the planet. A recent example is its GE9X engine, which was introduced at the Paris Air Show.

The GE9X reduces weight, which then improves fuel efficiency by approximately 10%. Other features for the GE9X include, but are not limited to, lower NOx emissions, ceramic matrix composites, and the highest compression ratio ever of 27:1.

General Electric might have impressed with its GE9X, but its innovation goes well beyond engines. For instance, GE Healthcare is developing an intelligent hospital robot system that will sort and sterilize surgical tools. Other areas of innovation include real-time monitoring of power generation equipment, rail-network optimization, and real-time operational intelligence for manufacturers.

General Electric saw revenue increase slightly in 2012 after three years of declines. Earnings have consistently improved over the past three years. General Electric currently yields 3.10%, and despite a debt-to-equity ratio of 3.01, the dividend appears to be safe.

Conclusion

If you are looking for a long-term investment in which you can slowly build a position and buy on dips, then all three of these companies should be considered. 3M has been the most consistent company of the three over the past several years, and for that reason you might want to consider it first. However, barring a stock market collapse, it would be difficult to go wrong with any of the aforementioned companies.

If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends 3M. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus