Buying 3M on Strong Relationships

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

The last week has seen a flurry of relationship activity for Minnesota-based 3M (NYSE: MMM), showing the depth of the company’s revenue streams. The conglomerate recently announced its intention to acquire advanced ceramics manufacturer Ceradyne (UNKNOWN: CRDN.DL), it remains in discussion to acquire the Consumer Products unit of Avery Denison (NYSE: AVY) and it released news of a partnership with Roku to bring streaming content to the projection space. Against a backdrop of solid financial metrics and positive price action, despite having recently traded at a 52-week high, 3M is a solid addition to your core portfolio.

The Merger

Under the terms of the agreement between the two companies, a 3M subsidiary will initiate a tender offer for all the outstanding Ceradyne shares at a price of $35. The company has annual revenues of approximately $500 million from sales in the automotive, defense, electronics and oil and gas spaces. The acquisition is expected to be accretive to 3M immediately, adding $0.01 on a pro forma basis and $0.05 on a GAAP basis. The addition of Ceradyne’s technologies will form a powerful and synergistic union with several 3M business lines through its Energy and Advanced Materials division.

A Future Acquisition

While the 3M and Avery Denison agreement was recently called off under the then-existing terms, sources close to 3M say that the company is still pursuing the acquisition of the Consumer Products division. With reference to the agreement breakdown, a 3M official is quoted as saying it is “disappointed with this turn of events.” The business unit remains on the sales block, meaning that there is still hope that the deal may be resurrected. The integration was expected to be beneficial to 3M, whose Scotch and Post-It brands are leaders in the industry. The Consumer products division is responsible for a large portion of the over fifty thousand products 3M currently has on the market.

Movie Night at Home

In a third recently-announced relationship, 3M detailed a partnership with Roku to release the first streaming video projector. The new product will allow consumers to combine the power of online streaming video with their existing Wi-Fi networks to “untether” from TVs, tablets and smartphones. The device will be able to project images up to 120-inches on virtually any flat surface without the need of being physically attached to any other device. Furthermore, the projector will come with a Roku Streaming Stick, allowing for access to over 600 channels; these channels will include paid ones from Netflix (NASDAQ: NFLX), Amazon (NASDAQ: AMZN) Instant Video and Hulu, as well as free channels like Crackle.

The development has the potential to not only change the way in which we all enjoy TV, but may serve as a completely new distribution venue for channel providers. Anyone familiar with the current state of affairs at Netflix understands the importance of such an innovation. A Roku official said: “The 3M Streaming Projector creates a big-screen Roku experience for people to enjoy content in any setting.”

The device is available through Amazon for $299 and currently offers a limited-time $20 credit for Amazon Instant Video. With a price point dramatically below the cost of most moderate-sized TVs, the product will likely be an option as an addition to one’s primary television. In either case, 3M is well positioned as the first mover in this area and could see dramatic sales heading into the holidays.

The Trade

With a P/E of 15.5, a PEG ratio of 1.57 and an operating margin of 21%, the company has attractive metrics relative to its peers. When each of the above developments is added to the mix, the stock becomes even more attractive. While critics point out that the stock is trading at its 52-week high, 3M has plenty of catalysts in place to keep driving the stock higher. Overall, the stock looks solid and is a buy at current levels.


Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Netflix. Motley Fool newsletter services recommend 3M Company, Amazon.com, and Netflix. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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