Why 3M stock has strong upside potential — Fundamental Analysis

Investment Information:

  • On December 13th, 2021, 3M sold one of their subsidiary companies (“SpinCo. Corp.”) to Neogen (one of their subsidiary companies “Nova RMT Sub Inc.)
  • 3M’s SpinCo is a food safety business, and the transaction implies that it is worth $5.3B (USD). 3M will retain 50.1% of the SpinCo subsidiary, and Neogen will assume the other 49.9% stake in the subsidiary.
  • This transaction “Reverse Morris” allows for a tax-free transfer of the SpinCO subsidiary, which is beneficial for both parties involved.
  • $8.9B in sales (7.1% YoY increase)
  • $2.45 Earnings per Share
  • Free Cash Flow of $1.5B (decreased by 29% YoY)
  • $1.4B in dividends distributed, and shares repurchased.
  • Updated guidance for sales growth by 2%, and decreased their EPS guidance by $0.20/share
  • $HON — Honeywell International: Honeywell International.is a diversified technology and manufacturing company. Its Aerospace segment offers several electronics, software, physical parts, and power units to their clientele in the aviation business. Honeywell’s Building Technologies segment offers applications software, switches, and electronics that assist in the building and construction industries. Its Performance Materials and Technologies segment offers automation control, software services; catalysts and adsorbents, equipment; bullet-resistant armor, nylon, and computer chips. The company’s Safety and Productivity Solutions segment provides personal protection equipment, apparel; cloud-based notification/emergency messaging; software solutions; and custom-engineered sensors.
  • $GE — General Electric: General Electric operates as a high-tech industrial company. The company’s Power segment offers gas turbines for utilities, power producers, and industrial applications; steam power technology (boilers, generators etc.); and reactor technologies. This segment services may industries, such as marine, oil and gas, mining, rail, metals, test systems, and water. GE’s Renewable Energy segment provides various solutions for onshore and offshore wind, blades, hydro, storage, solar, and grid solutions, and hybrid renewables. The company’s Aviation segment designs/produces commercial and military aircraft engines, integrated engine components, electric power, and mechanical aircraft systems; and provides aftermarket services. Its Healthcare segment develops, manufactures, markets, and services various medical devices and software. The company’s Capital segment offers aviation leasing and financing and working capital services; financial solutions and underwriting capabilities; and insurance products.
  • $EMR — Emerson Electric: Emerson Electric Co. manufactures technology/engineering products for industrial, commercial, and consumer markets worldwide. The Automation Solutions segment offers measurement and analytical instrumentation, industrial valves and equipment, and process control software and systems. It serves the oil and gas, refining, chemicals, power generation, life sciences, food and beverage, automotive, pulp and paper, metals and mining, and municipal water supplies markets. The Commercial & Residential Solutions segment offers residential and commercial heating and air conditioning products, monitoring equipment and electronic controls for gas and electric heating systems.
  • $PH — Parker-Hannifin: Parker-Hannifin Corporation manufactures sells motion and control technologies and systems for various mobile, industrial, and aerospace markets worldwide. The Company’s Diversified Industrial segment offers sealing, shielding, thermal products. Filters, control solutions, and electromechanical components. Its Aerospace Systems segment offers products for use in commercial and military airframe and engine programs, fuel systems and components, pilot controls, and wheels/brakes.
  • Yearly Financial Performance (Good): In 2020, 3M’s net sales essentially remained constant, however, they were able to decrease their operating expense by 3.6%, which helped to contribute to a higher operating income and a higher operating margin. Additionally, 3M was able to increase their net income in 2020 by 18% which is very high, and their EPS ended the year at $9.32 (up from 2019’s EPS of $7.92).
  • Yearly Financial Performance (Bad): In 2020, 3M’s Transportation and Electronic segment’s revenues decreased by 8% and represents their only declining segment. However, within these segments the Abrasives, Advanced Materials, Aerospace, and Oral Care performed the worst, declining 15%, 17%, 16%, and 19% respectively.
  • Q3 2021 Financial Performance (Good): In Q3 2021, 3M increased their net income by 0.3%, which might not sound good, however, considering 3M’s operating income decreased in this time period any increase in net income is great. Furthermore, 3M was able to keep their EPS (basic and diluted) constant during this time, which is again good considering their decline in operating income.
  • Q3 2021 Financial Performance (Bad): In Q3 2021, 3M increased their net sales by 7% YoY, now you may be wondering “how is this bad”? Well, during this same period, 3M increased their operating expenses by 11%, which contributes to a lower operating margin. This can be seen by their YoY decline in operating income of 6%
  • Share Repurchasing: In the first 3 quarters of 2021 (Jan 1 — September 30th), 3M reported repurchasing 6,675,484 at an average cost basis of $190.88/share (totalling $1.27B worth of shares repurchased). This would have increased the value of existing shares by approximately 1.2%, which is a great sign for longer term investors.

Investment Valuation:

Investment Plan:

  • Enter into a position below the fair value, preferably at/below $180/share.
  • Hold long-term (with dividend re-investment)
  • Re-evaluate the position as new data is released (especially the 10-Q (quarterly) and 10-K (annual) reports).

Catalysts:

  • Financial Performance: In 2020 and Q3 of 2021, 3M reported decent earnings, but there are still areas to improve upon in order to attract more investors, and potentially increase the share price. Firstly, their net income has been steadily increasing (which is good), despite their operating income either increasing or decreasing. If they can find a way to keep their operating income to consistently grow,, translating in higher increases in their net incomes this would be good.
  • Share Repurchasing: Over the past couple of years, 3M has been repurchasing more shares than they have been issuing. This is a very good trend for investors to note, as every year their shares represent a larger stake in their company. These repurchases help investors to return more on their invested capital.

--

--

--

The social platform for investment ideas and insights. Check out utradea.com for the latest investment content.

Love podcasts or audiobooks? Learn on the go with our new app.

Recommended from Medium

Global Flooring Market is estimated to reach USD 343.6 Billion by 2024 at a CAGR of 5.2%

Applied AI in Retail Supply Chain — What’s In Store?

Increasing Vehicle Production To Propel The Automotive Diagnostic Scan Tools Market

Business and the Cartesian Demon

News:Global Aerospace Valves Market is projected to reach a value of over USD 6 billion by 2027

Microsoft Acquires Nuance: 1% of Market Cap for a New Narrative in Healthcare

Global MEMS Oscillator Market is projected to reach a value of over USD 2.5 billion by 2027

SFDR — the new ESG regulation in the European Union

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Utradea

Utradea

The social platform for investment ideas and insights. Check out utradea.com for the latest investment content.

More from Medium

Introduction to Financial Analysis (101)

$ABG Stock: Learn why their growth plan can propel the stock to new highs

Book Summary: The Psychology of Money by Morgan Housel

Jump to fundamental substance Moving Material science and Astrophysics PC history Coronavirus News…