MMM is down -39.3% in the last year – it’s worth a hard look

Over the weekend, the focus in news media seems to have shifted a bit. It isn’t that discussion and commentary has materially changed – COVID-19, and its accelerating rate of infection in the U.S. is still front and center – but as it relates to the market and the economy, much of the conversation is starting to be less about trying to get things restarted as quickly as possible and more on facing the reality that current measures – not merely social distancing, but in many cases applying a “shelter in place” mindset to limit the spread and eventually, finally begin to  let social begin returning to a sense of normalcy.

The struggle to deal successfully with a global pandemic has a number of different aspects. Finding treatments, and cures involves a lot of research and development. In and of itself, that is a complex logistical discussion, involving everything from putting testing procedures in place to identify infected patients to useful antiviral treatments to vaccines. Another element that is just as critical is making sure that the people working on the front lines – healthcare providers and medical professional, for example – have the supplies and equipment they need not only treat and care for patients, but also to protect themselves.

If you’ve spent time at a hospital, you probably haven’t taken time to notice the boxes of surgical gloves, protective masks, bottles of hand sanitizer and more. This is actually something that marks a stress point in the medical system right now; as the number of infections increases, the number of people needing to be hospitalized will naturally also increase. Consider also that while COVID-19 is dominating the discussion right now, it is not the only malady that the health care system is forced to deal with on a daily basis. That means that there is still a normal level of daily activity that hospitals and clinics have to deal with; coronavirus is an element that not only adds complexity, but also puts pressure on the businesses that produce them to meet the increasing demand.

One of those companies is 3M. 3M is a conglomerate that works in a numbers of segments of the economy. One of those is Health Care. The market’s shift lately to pay attention to stocks that supply the health care industry puts their operations in focus, and has helped the stock rebound in the last week from a multiyear low point around $114. With a number of fundamental strengths working in its favor, does its recent rally signal an opportunity for a value-focused investor to work with a good company that offers a higher-than-average dividend yield on a useful long-term basis?

Fundamental and Value Profile

3M Company is a technology company. It operates through five segments. The Industrial segment serves a range of markets, such as automotive original equipment manufacturer and automotive aftermarket, appliance, paper and printing, packaging, food and beverage and construction. The Safety and Graphics segment serves a range of markets for the safety, security and productivity of people, facilities and systems. The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, health information systems and food manufacturing and testing. The Consumer segment serves markets that include consumer retail, office business to business, home improvement, drug and pharmacy retail, and other markets. MMM has a current market cap of $76.9 billion.

Earnings and Sales Growth: Over the last twelve months, earnings declined -15.6% while sales increased about 2%. In the last quarter, with earnings dropped -24.4% and sales rising roughly 1.5%. The company operates with an impressive margin profile, with Net Income running at 14.22% of Revenues over the last twelve months; this number declined in the last quarter, but remains healthy at 11.94%.

Free Cash Flow: MMM has healthy free cash flow of $5.5 billion over the last twelve months. This number equates to a Free Cash Flow Yield of a little over 7%.

Debt to Equity: MMM has a debt/equity ratio of 1.79, which is high and implies the company is highly leveraged. As of the last quarter, the company had $2.5 billion in cash, versus $18 billion in long-term debt. Their healthy operating margins, along with their solid cash position suggests that servicing their debt is not a concern, and despite their high leverage, the company maintains a healthy level of liquidity.

Dividend: over the last year, MMM has paid an annual dividend of $5.88 per share, which at its current price translates to a yield of about 4.41%. MMM has a long history of maintaining, and growing its dividend, which is useful and constructive in an environment that now has short-term bond yields below 1%.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $173 per share, which means that MMM is very undervalued, with more than 30% upside from its current price.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above displays the stock’s price activity over the last year. The stock had been moving in a mostly sideways pattern for most of the last several months, until late January when broad market sentiment pushed the stock from around $180 per share to its recent low around $114. Current resistance is around $138 per share, with  upside to about $146 if bullish momentum can push the stock above that point. Immediate support is around $130, with downside to about $114 if that support doesn’t hold.

Near-term Keys: Given the MMM’s fundamental strength and compelling value proposition, it’s hard not see the stock as a strong long-term opportunity. Market volatility right now could keep the stock moving in fairly wide swings from short-term high to low, however, so if you are thinking about using the stock, make sure that you’re prepared to accept that possibility. If you prefer to work with short-term investments, use a push above $138 as a signal to consider buying the stock or working with call options with a profit target around $146, and a drop below $130 to think about shorting the stock or working with put options, using $114 as a bearish target.