Is 3M Rally Worth Chasing?
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As we all know by now, stocks have had a great rally in the last few months, leaving the main benchmark indices trading at fairly high multiples. High quality blue-chip stocks are looking a little expensive across the board, which has me wondering whether or not it’s worth chasing the rally in some of these stocks. 3M (NYSE: MMM) is one of the large cap companies that have enjoyed a very solid run recently. Could there be more upside in store for this conglomerate?
Stock at a Glance
3M is a strongly diversified technology manufacturer with operations in a wide range of markets. A well-established company with a long history, 3M is one of America’s largest manufacturers, enjoying a sizable market cap of around $70 billion. Its beta of 1.03 makes it more or less as volatile as the broader market, and the stock yields about 2.3%. 3M’s main strength is its geographical diversity, earning approximately two-thirds of its revenue from abroad, with emerging markets accounting for about half of that and the lion share of the company’s growth. The stock is up 16.57% in the last twelve months.
Earnings and Cash Position
3M’s latest earnings report, released earlier in January, was in line with analyst estimates. Q4 2012 EPS came in at $1.41, which met the consensus, with sales up 4.2%. Revenue was up 4% YoY, which was above estimates by about 3%. Organic growth was also up around 4%, with volumes up 3.6%. Geographically, Europe continues to deliver soft sales, but US organic sales were up 5.2% and APAC, excluding Japan, up nearly 10%. For the full-year, EPS was up 6%, with 5 of 6 segments delivering margins over 21%. In terms of a cash position, the company appears to be fairly comfortable with about $4.5 billion in cash, versus 6 billion in debt, or a total debt to equity ratio of about 33. Leveraged free cash flow is at $2.28 billion, which leaves the company with some money to invest.
3M appears to be delivering slightly better growth than prime competitor Siemens (NYSE: SI). Siemens delivered a 3% increase in revenue for full-year 2012, with Q4 net income down 2% compared to the same period a year before. Additionally, orders for the full-year were down 4%. Siemens has more cash on hand than 3M, but also more debt, with a total debt to equity ratio of 72.6. Also, Siemens has a considerably lower leveraged free cash flow at only $263 million.
Valuations and Metrics
3M trades at 16.11x earnings, which is at a bit of a premium to the 14.44x industry average. The forward P/E is a bit better at 13.56x. The price to sales ratio is also a bit higher than the industry average, at 2.34 versus 1.4. However, the operating margin is excellent with 21.7%, and return on equity is also good with 26.6%. Johnson and Johnson (NYSE: JNJ), who compete with 3M in the healthcare segment, trade at 19.3x earnings, and about 3.1x sales. With a massive market cap of over $200 billion dollars, J&J maintains a higher operating margin than 3M with a slightly lower total debt to equity ratio.
Although 3M has had a great run recently, there still may be some upside left for this technology manufacturer. With solid earnings that are on the increase, as well as a fair valuation, the stock is a solid blue-chip choice with fairly low volatility, as well as a dividend. Cautious investors may be best off waiting for a pullback, as the stock is looking a little over-extended at the moment and is trading at a slight premium to the industry.
DUJames has no position in any stocks mentioned. The Motley Fool recommends 3M and Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. 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!