MMM - 3M Company

[no_free_lunch]

I have been looking into 3M lately.  I have read about the company numerous times over the years but have never invested as I didn't think outsized results were possible given the maturity of the company and the sector they are in.  However, given the current state of the stock market and the company priced at a 14 PE I have been rethinking things.

 

UPSIDE

 

First the good, 3M is a heavily diversified company which makes .. well lots of different manufactured products.  Honestly check out their profile if you are interested in the specifics but they essentially invent thousands of different products across 5 or 6 major business segments.  It is this innovation that makes them interesting and what actually drew me to them.  They are essentially an idea machine, the whole process of invention is both encouraged and expected.  I  believe they have 15% time where certain employees are allowed to spend 15% of their work time on inventions that are only tangentially related to what they are doing.  Many of these ideas translate into future products.  They acquire patents on the inventions which is where their moat is. 

 

You can see the moat translate into their financials, the company has had net margins (net income / revenue) of 21-22% which seems quite high for manufacturing.  They reinvest 5-6% of revenue into R&D, have been for years and it has been working out for them.    I should also mention that in spite of the R&D they depend on acquisitions for a certain amount of their growth.

 

They are diversified with 2/3 of sales coming from outside of the US.

 

The balance sheet is clean albeit with fairly modest shareholder equity (~14% tbook/price).  I view it as being all about the PE so am not overly concerned.  I am just happy their is not much debt.   

 

Essentially I see the long-term return as follows: 

  2.5% dividend

  6-8% income growth (I believe they are aiming for closer to 10% but that is probably not realistic)

 

So you are looking at 8.5 - 10.5% return for a high quality company which is good but obviously not great.  They have a share repurchase program which could raise the number a percent or so.  However, if you look at their past results their have been numerous times over the past decade where they traded at a PE of closer to 20.  The strategy would be to take the 8-10% and wait for them to have a few good quarters, analyst upgrades, etc (which seems to happen every 2 to 4 years) and at that point exit with an additional 25-35% gain from PE expansion.  If it took 3 years for the PE expansion to happen, you could get around 20% per year.    It is also a weak defensive play (relative to financials), they will obviously take a serious hit should we hit a major recession but ultimately, not having debt they should recover.  Their is also some positives should commodities hit a serious slump as they would benefit from lower input costs. 

 

 

DOWNSIDE

 

The downside which is what I wanted an opinion on, is the pension.  It seems that they have a defined benefit pension and I am quite concerned about the extent to which this could drag down earnings.  Everything should be okay with the pension as long as the stock market does okay but if we hit extended malaise, low bond yields and a bad stock market this would  impact the pension and they could be facing significant charges to shore it up.

 

If you look at their most recent 10-K they have $11.575B in pension assets.  Their "projected" pension obligation is $14.499B.  I am not very familiar with the terms behind pensions but it would seem that is what they are expected to need in total, obviously it is based on a certain calculation of life expectancy and investment return.  I found somewhere else on the 10K that they expect an 8.5% return which seems high in the current environment for a pension.

 

Looking at more details I found that they are expecting about $1B in pension obligations this year, with that number working up closer to $1.35 B by 2017.  It seems like this is a very high amount when you only have $11.5B in assets to draw from and a bond market that pays 2-3%.  They have an item on their comprehensive income statement called Defined benefit pension and postretirement plans adjustment which has $1.3B under it so it seems they are already taking pension hits.

 

I am just quite concerned that the company will end up with ongoing pension adjustments if the economy is slow, which I expect it to be.  Ultimately that will hit the earnings and at that point you would need the PE expansion just to break even.  Anyone else looked at pensions or have any opinions? 

 

 

[Palantir]

This is a good company, and I was studying it earlier this year, but I feel given its mature growth rate, it is fairly valued. It's I think the kind of stock you need to put on a watchlist and follow for years and when it goes down to your "buy" price, you strike!

[sleepydragon]

Anyone have opinions on MMM?

Very good business. PE is 20. not cheap but a lot cheaper than its last high.

 

Seems an ideal business for Berkshire to own too.

[LC]

Similar thoughts: great biz, fair price. I own it.

[no_free_lunch]

It isn't cheap enough for me at the moment.  Revenue is stalled out.  I would be more comfortable with a PE in the 15-16 range.

 

That being said, I could see it outperforming the S&P500 at current prices.

[Spekulatius]

DD is somewhat similar to MMM, but cheaper, imo.

[LC]

DD is somewhat similar to MMM, but cheaper, imo.

Somewhat similar but I would argue MMM is a more reliable business. Looking over 5-10 years I see MMM has more stable revenue change rates, and changes in gross, operating and net margins, greater and more stable reduction in share counts over those years. I will give Dupont credit for managing their credit (:)) profile although perhaps the argument can be made that MMM should be levering up their balance sheet given their stable business and rate climate.

[Spekulatius]

DD is somewhat similar to MMM, but cheaper, imo.

Somewhat similar but I would argue MMM is a more reliable business. Looking over 5-10 years I see MMM has more stable revenue change rates, and changes in gross, operating and net margins, greater and more stable reduction in share counts over those years. I will give Dupont credit for managing their credit (:)) profile although perhaps the argument can be made that MMM should be levering up their balance sheet given their stable business and rate climate.

 

Looking back 5-10 years doesn‘t really make sense for DD , since so much has changed since they merger with DOW Chemical and split the company three ways.

 

DD results are messy at this point, donut doesn’t screen well. Hopefully, in a few years , the company will look much better.

 

DuPont really was one of the worst managed companies in the industry since the 1990‘s and maybe back further.

[james22]

Buy shares of this mask supplier to survive the selloff: analysts

 

As the deadly coronavirus sweeps the globe and slams businesses across multiple industries, one company could dodge the selloff.

 

Best known as the maker of Scotch tape and Post-It notes, 3M (MMM) also happens to be one of the largest producers of N95 respirators, the type of mask that more efficiently protects people against the virus than ordinary medical masks.

 

3M has suffered through nine quarters of weak results, according to Melius Research, but the demand for masks is a big plus for the company, which is the largest supplier of N95 respirators in the US.

 

On Wednesday, Melius Research upgraded its rating on 3M stock to a buy.

"The simple reality is that 3M is one of only a handful of S&P names that sells a necessary product in virus containment," according to the Melius report. "This is being ignored by the market."

 

https://edition.cnn.com/2020/02/27/business/3m-coronavirus-hedge/index.html

 

 

[chrispy]

What percent of revenue do the masks contribute?

[james22]

~5-10%?

 

https://dashboards.trefis.com/no-login-required/TvMQC01w/Which-is-the-biggest-division-amongst-the-26-business-divisions-housed-in-3M-?fromforbesandarticle=trefis200127

 

But:

 

This would not be the first time that 3M benefited from a global health crisis. When the SARS epidemic hit in 2003, 3M's sales growth shot up amid increased demand for its respirators, according to the Melius report.

 

"The 2002 impact from SARS was highly beneficial to 3M," said Scott Davis, a co-author of the report, told CNN Business. While the company didn't disclose any specifics at the time, "it was meaningful and helped the stock to outperform in that period."

[sleepydragon]

I bought some a couple days ago.

Great business trading at reasonable valuation

 

[Dalal.Holdings]

https://www.vox.com/policy-and-politics/2020/2/29/21159273/coronavirus-death-trump-health-officials-travel-ban-iran

 

the administration announced they’re making 40 million more masks available to healthcare workers and are contracting with 3M to commission 35 million more.

[Castanza]

https://twitter.com/realdonaldtrump/status/1245876816922972162?s=21

 

[DooDiligence]

https://twitter.com/realdonaldtrump/status/1245876816922972162?s=21

 

I love the guy who responded,

 

"tough talk from the guy who wants us to forget that he golfed and held rallies the entire month of February and then told us all that the virus was a Democrat hoax and then spent three weeks yammering on about how the virus was no big deal. seven weeks lost to incompetence, bruh"

[fareastwarriors]

How 3M Plans to Make More Than a Billion Masks By End of Year

 

The company is using “surge capacity” to increase the production of N95 masks to fight the pandemic. Localized supply chains are a secret weapon, too.

 

 

https://www.bloomberg.com/news/features/2020-03-25/3m-doubled-production-of-n95-face-masks-to-fight-coronavirus?srnd=businessweek-v2

 

[Spekulatius]

https://twitter.com/realdonaldtrump/status/1245876816922972162?s=21

 

So what’s the reason. Defense act only applies to domestic production. Every other country is hit too and does the same thing basically. Most mask are produced in China anyways.

 

FOr what it’s worth, the MA governor on today briefing said that MA ordered N95‘s mask a while ago, which came through NY (airport) and were confiscated there. It’s a Wild West out there and everyone grabs what they can. Next shipment for N95’s for MA is coming though Logan Airport.

[Castanza]

https://twitter.com/realdonaldtrump/status/1245876816922972162?s=21

 

So what’s the reason. Defense act only applies to domestic production. Every other country is hit too and does the same thing basically. Most mask are produced in China anyways.

 

FOr what it’s worth, the MA governor on today briefing said that MA ordered N95‘s mask a while ago, which came through NY (airport) and were confiscated there. It’s a Wild West out there and everyone grabs what they can. Next shipment for N95’s for MA is coming though Logan Airport.

 

That's what I'm not understanding. I saw some speculation that perhaps masks being made in other countries for the US are never actually making it over here. If the NYC MA story you noted is true then I can absolutely see that. At the end of the day, what can 3M do about it? It's a risk of operating in another country I guess. Instead of bashing a great company Trump should use it as a broad talking point about how we need to move some manufacturing back to the states .

 

Anyways don't want to derail the thread into politics so I'll end there. Just found it peculiar.

 

Hope this presents and even better buying position. MMM is already quite cheap.

[mcliu]

It’s in response to this:

 

3M is selling lifesaving PPE to foreign countries over US: Florida Official

 

Apparently domestic production is being sold abroad to highest bidder.

[rb]

The US would probably want to be pretty careful with this. Prevent outgoing shipments and the other countries retaliate. How does it look when you have no incoming shipments? Globalized supply chains and all that, stuff comes in, stuff goes out.

[Spekulatius]

The US would probably want to be pretty careful with this. Prevent outgoing shipments and the other countries retaliate. How does it look when you have no incoming shipments? Globalized supply chains and all that, stuff comes in, stuff goes out.

 

I bet there is more PPE coming on from abroad than is exported from the US to abroad. Starting this petty war is a fools game. There are rumblings that the US intercepted a french order for masks from China by bidding higher before it was delivered. Not good.

[K2SO]

Zero-sum thinking on Trump's part, glad 3M called him on it but who knows if it will resonate. All this nationalist closed-border bullshit will leave us all worse off in the long run and it will make this recession worse if it continues and expands.

 

[Spekulatius]

Zero-sum thinking on Trump's part, glad 3M called him on it but who knows if it will resonate. All this nationalist closed-border bullshit will leave us all worse off in the long run and it will make this recession worse if it continues and expands.

 

Yes, there is real chance that we repeat the 1930‘s. Scary.

[estoybien]

The US would probably want to be pretty careful with this. Prevent outgoing shipments and the other countries retaliate. How does it look when you have no incoming shipments? Globalized supply chains and all that, stuff comes in, stuff goes out.

 

That's exactly the point 3M made. Of course, they're absolutely right.

And of course, 3M politely declined to mention that Trump sent 18 tons of medical supplies to China in Feb while doing diddly squat to prepare the US. So he's not just an imbecile but also a hypocrite. But we knew that already.

I kinda wanna invest in 3M as a matter of political expression of support.

[fareastwarriors]

3M Explores $3.5 Billion Sale of Food Safety Division

 

https://www.bloomberg.com/news/articles/2020-09-22/3m-said-to-explore-3-5-billion-sale-of-food-safety-division