Is 3M a Good Stock to Buy?

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

3M (NYSE: MMM) isn’t flashy, but the $66 billion market cap conglomerate has been getting steady growth in earnings per share this year. 3M’s businesses have a considerable range: it makes industrial products, office supplies, healthcare products, and other offerings. In total, its revenues for the first half of 2012 were about flat versus the same period in 2011, and net income was only up 2%. However, a reduction in share count (slightly more than half of cash flow from operations was used to repurchase shares) helped the company report $3.25 in earnings per share, versus $3.09 in the first six months of last year.

These aren’t great growth numbers, but that’s not the bull case for 3M. Its advantage as an investment is that it trades at 16 times trailing earnings—not a particularly low multiple for a stable business, but not particularly high either. It also pays a dividend yield of 2.5%. The stock has a beta of 1—it tends to fluctuate up or down by about as much as the broader market—and it has held to that statistical trend over the last year, rising 28% versus the S&P 500’s 26%. Based on analysts estimates, the company trades at 14 times 2013 earnings.

We would compare 3M to other highly diversified companies, the most obvious of which is General Electric (NYSE: GE). GE carries a trailing P/E multiple of 20, higher than 3M’s, but Wall Street analysts expect the business to do better over the next year, and so its forward multiple drops about even with 3M’s at 13. It’s possible that GE does in fact have better growth prospects, and that its portfolio of businesses leans more towards (for example) energy, but the company’s earnings were down in the second quarter of the year versus Q2 2011. As such we think that 3M is more dependable in terms of delivering on its earnings targets or at least holding steady.

We would also consider United Technologies (NYSE: UTX), Leucadia (NYSE: LUK), and Johnson & Johnson (NYSE: JNJ) to round out a good mix of comparable companies. United Technologies is involved with construction and building services as well as aerospace; Leucadia’s operations range from natural resources to entertainment, to manufacturing and health care; Johnson & Johnson represents health care offerings similar to 3M’s.

Leucadia is actually seeing negative earnings forecasts for next year from the Street, and even on a trailing basis it is quite expensive. With the company also seeing more exposure to the broader economy at a beta of 1.8 and paying a lower dividend yield than 3M, we would avoid it. Johnson & Johnson has good appeal to defensive-minded investors, as its beta is only 0.5 and its dividend yield is 3.5%, but in terms of value it is in the same boat as GE. Its trailing P/E of 22, partly driven by a drop in earnings last quarter, gives it a premium relative to 3M; however, its forward P/E is 13.

We think it’s a safer pick than GE, and if that is of particular importance to an investor they might want to go with Johnson & Johnson; otherwise, 3M looks a bit better using the same logic we did with GE though obviously the gap between the two is narrower here. United Technologies has a stagnant business. At 17 and 13 times trailing and forward earnings, respectively, and a 2.7% dividend yield, we see very little daylight between it and 3M on a quantitative basis.

Conglomerates as whole seem to be priced quite closely together. GE and Leucadia don’t seem like good buys compared to 3M, but other than that the company seems priced about right compared to its peers.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.The Motley Fool owns shares of General Electric Company and Johnson & Johnson. Motley Fool newsletter services recommend 3M Company and 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.If you have questions about this post or the Fool’s blog network, click here for information.

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