MMM: Gauge Analysis (updated February 21, 2021)

I have analyzed 3M's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

Formed more than a century ago as Minnesota Mining and Manufacturing, the 3M Company is now a conglomerate that sells a wide range of innovative products for Safety and Industrial, Transportation and Electronics, Health Care, and Consumer markets.  While many 3M products have been designed for demanding commercial and medical applications, consumers might be more familiar with the company's Scotch® tape and Post-It Notes®.  COVID-19 has affected 3M's businesses in different ways:  sales of N-95 masks and certain other health care and consumer products have grown, while sales of industrial products have fallen.  In December 2020, 3M announced it would be taking actions to eliminate redundancies and better leverage analytical data to become more efficient in both operations and marketing.

3M recorded profits of $5 billion on revenue of $32 billion during the last year. In the quarter that ended on December 31, 2020, 3M earned $2.38 per share, which beat the $2.26 Wall Street consensus forecast. See 3M's most recent quarterly report.

Shares of 3M now trade for about $177 each, giving the company a market value of $100 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

3M's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $103 billion (mega-cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 1.9 (>2.0 is conservative)

    Long-term debt/Working Capital = 256% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = 6% (modest)

4. The Company Exhibits Earnings Growth: YELLOW

    Owner Earnings growth rate (trailing year) = 25% (very good)

    Owner Earnings growth rate (five-year average) = 3% (weak)

    Free Cash Flow growth rate (trailing year) = 23% (very good)

    Free Cash Flow growth rate (five-year average) = 6% (modest)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 26% (very good)

    Operating Profit/Sales = 21.0% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 8% (fair)

    Dividend = 52% of last year's FCF (sustainable)

7. The Company's Shares are Fairly Valued: YELLOW

    Price/Owner Earnings (last year) = 18.8 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 21.0 (moderate to pricey)

    Free Cash Flow/Market Value = 6.4% (appealing, more than the five-year average of 4.9%)

    Acquirer's Multiple = 17.3 (expensive)

    Price/Book Value = 8.0 (less expensive than the five-year average of 10.1)

    Price/Sales = 3.2 (less expensive than the five-year average of 3.5)

In summary, the analysis assigned 3M Company four GREEN, three YELLOW, and zero RED grades.  The resulting Overall Score is 58 of the 100 possible points, which is a good, but not quite high enough result.  The score is below the 60-point GCFR threshold, and, therefore, 3M does not satisfy the GCFR criteria for value-investment consideration at this time.

The share price would theoretically have to fall by 2.5%, from $176.50 to $172.14, all else being equal, to lift the Overall score to the 60-point threshold. It is also possible that 3M's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on 3M's performance and the latest GCFR gauges and scores.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #3m    #mmm    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

3M Company: Earnings Report for the Quarter Ending December 31, 2020

3M Company reported before the market opened on January 26, 2021 it earned $2.38 per diluted share in the quarter that ended on December 31, 2020, up 43 percent from earnings of $1.66 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Adjusted earnings, a non-GAAP figure, rose 23 percent to $2.38 per share from $1.94 one year earlier, a less robust change than the GAAP percentage. 

This post compares the quarterly Income Statement published by 3M to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by 3M's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  Formed more than a century ago as Minnesota Mining and Manufacturing, the 3M Company is now a conglomerate that sells a wide range of innovative products for Safety and Industrial, Transportation and Electronics, Health Care, and Consumer markets.  While many 3M products have been designed for demanding commercial and medical applications, consumers might be more familiar with the company's Scotch® tape and Post-It Notes®.  COVID-19 has affected 3M's businesses in different ways:  sales of N-95 masks and certain other health care and consumer products have grown, while sales of industrial products have fallen.  In December 2020, 3M announced it would be taking actions to eliminate redundancies and better leverage analytical data to become more efficient in both operations and marketing.

Revenue in the December 2020 quarter totaled $8.6 billion, 6 percent more than last year's $8.1 billion. The Safety and Industrial business was responsible for 37 percent of overall revenue, and this unit's revenue grew by 12.7 percent compared to the year-earlier result. The Transportation and Electronics business contributed 27 percent of revenue, and this unit's revenue increased by 2.3 percent. The Health Care unit supplied 26 percent of revenue, and this business's revenue rose by 5.4 percent.

I was expecting 3M to report revenue of $8.3 billion for the December 2020 quarter.  The actual amount surpassed my estimate by $283.0 million (3.4 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $4.4 billion in the latest quarter, which translates into a Gross Margin of 48.9 percent of revenue. Since it was higher than the 46.7 percent Gross Margin achieved in the year-earlier quarter, it signifies that 3M sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 48.0 percent in the December 2020 quarter, and 3M exceeded that prediction by 0.9 percent.

3M spent $0.46 billion on Research and Development in the latest quarter, down from $0.52 billion one year ago. I had estimated that R&D expenses would be $0.50 billion.  R&D was 5.3 percent of Revenue.

Sales, General, and Administrative expenses totaled $1.9 billion in the December 2020 quarter, down from $1.9 billion one year ago.  SG&A expenses decreased from 23.9 percent to 22.0 percent of quarterly revenue, which shows 3M spent less per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 21.0 percent of revenue, and 3M spent more than that percentage.

The last operating expense line on the Income Statement is for other operating income and expenses, such as restructuring.  This line amounted to a $0.0 million loss in the latest quarter.  I was expecting a net loss of $150.0 million due to restructuring.  The charge must have been included in one of the other operating expense items.

Operating Income was $1.8 billion in the quarter, up 39.5 percent from the year-earlier period.  Operating Income exceeded my $1.6 billion estimate by $0.3 billion.

Interest and other non-operating items summed to a net expense of $139 million.  My estimate was $100.0 million.

The effective income tax rate fell by 1.5 percent to 18.5 percent, which had a positive effect on net income.  I expected the tax rate to be 21.0 percent.

Net income in the quarter was $1.4 billion, $2.38 per share.  The figures for the year-earlier quarter were $1.0 billion, $1.66/share. My EPS estimate was $2.02.

In summary, 3M's earnings were much better than I expected.  The major factors that resulted in this achievement were: strong revenue growth, an improved Gross Margin, reduced R&D spending, and a lower tax rate.

The Cash Flow Statement for the quarter shows that 3M's operating activities generated $2.5 billion in cash during the last quarter, up 7.6 percent from $2.3 billion in the year-earlier period. The cash flow delta was, therefore, less robust the change in earnings. Notable uses for cash included $848 million to pay dividends to shareholders, $2 million to buy back the company's common shares, and $422 million to acquire property, plant and capital equipment. 

Free cash flow over the last 12 months totaled $6.6 billion, or $11.32 per share using the latest share count. At the current market price per share of $170.40, this translates into a decent Free Cash Flow Yield of 6.6 percent.

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #3m    #mmm    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

MMM: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for 3M Company's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on January 26, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about 3M.

Formed more than a century ago as Minnesota Mining and Manufacturing, the 3M Company is now a conglomerate that sells a wide range of innovative products for Safety and Industrial, Transportation and Electronics, Health Care, and Consumer markets.  While many 3M products have been designed for demanding commercial and medical applications, consumers might be more familiar with the company's Scotch® tape and Post-It Notes®.  COVID-19 has affected 3M's businesses in different ways:  sales of N-95 masks and certain other health care and consumer products have grown, while sales of industrial products have fallen.  In December 2020, 3M announced it would be taking actions to eliminate redundancies and leverage analytical data to become more efficient in both operations and marketing.

With a market value of about $100 billion on a fully diluted basis, 3M is included in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 indices.

3M recorded profits of $5 billion on revenue of $32 billion during the last year. In the quarter that ended on 30 September 2020, 3M earned $2.43 per share, which beat the $2.26 Wall Street consensus forecast. See https://tinyurl.com/y23nrbbb for 3M's most recent quarterly report.

Revenue in the September quarter totaled $8.4 billion, 4% more than last year's $8.0 billion. The Safety and Industrial business was responsible for 36% of overall revenue, and this unit's revenue grew by 6.9% compared to the year-earlier result. The Transportation and Electronics business contributed 28% of revenue, and this unit's revenue fell by 7.4%. The Health Care unit supplied 26% of revenue, and the amount grew by 25.5%.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

3M's management, noting the uncertain impact of COVID-19, decided to forego providing the normal guidance for the fourth quarter when the company published its third-quarter results last October. Nevertheless, the company has shared two key pieces of information.  3M announced in early December that it had sales of $5.7 billion combined in October and November.  The company, while remarking that "significant macroeconomic uncertainty remains" estimated that total sales for the fourth quarter would be between $8.2 to $8.4 billion.  I'll use the average of these two figures.

In addition, 3M announced that corporate restructuring activities would lead to a pre-tax charge of $250 to $300 million, and about half this amount would be recorded in the fourth quarter of 2020.  The restructuring charge may be excluded from non-GAAP results, but I include it.

The following baseline Income Statement tries to take into account the information mentioned above, and it's consistent with the company's historical results. Earnings are estimated at $1.18 billion ($2.02 per share).

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #3m  #mmm  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

3M Company: Gauge Analysis (updated November 22, 2020)

I have analyzed 3M's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation is weighted to favor companies that exhibit good value characteristics over firms that are fast growers but expensive.

An Overall Score of 60 or higher is a good result, and it signifies that the company has enough value-investment appeal to be worth examining in more detail.

First, a quick review of the company itself.

Formed more than a century ago as Minnesota Mining and Manufacturing, the 3M Company is now a diversified manufacturer of innovative products for Safety and Industrial, Transportation and Electronics, Health Care, and Consumer markets.  While many 3M products have been engineered for demanding industrial and medical applications, consumers might be more familiar with the company's Scotch® tape and Post-It Notes®.  COVID-19 has affected 3M's businesses in different ways:  sales of N-95 masks and certain other health care and consumer products have grown, while sales of industrial products have fallen.

3M recorded profits of $5 billion on revenue of $32 billion during the last year. In the quarter that ended on 30 September 2020, 3M earned $2.43 per share, which beat the $2.26 Wall Street consensus forecast. See https://tinyurl.com/y23nrbbb for 3M's most recent quarterly report.

Shares of 3M now trade for about $173 each.  These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

3M's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $100.7 billion (mega-cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 1.9 (>2.0 is conservative)

    Long-term debt/Working Capital = 275% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = 8% (modest)

4. The Company Exhibits Earnings Growth: RED

    Owner Earnings growth rate (trailing year) = 1% (weak)

    Owner Earnings growth rate (five-year average) = 0% (poor)

    Free Cash Flow growth rate (trailing year) = 19% (good)

    Free Cash Flow growth rate (five-year average) = 3% (weak)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 26% (very good)

    Operating Profit/Sales = 19.7% (very good)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 8% (fair)

    Dividend = 54% of last year's FCF (sustainable)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 20.6 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 20.9 (moderate to pricey)

    Free Cash Flow/Market Value = 6.3% (appealing, more than the five-year average of 4.8%)

    Acquirer's Multiple = 18.5 (expensive)

    Price/Book Value = 8.4 (less expensive than the five-year average of 10.2)

    Price/Sales = 3.2 (less expensive than the five-year average of 3.5)

In summary, the analysis assigned 3M Company four GREEN, one YELLOW, and two RED grades.  The resulting Overall Score is 52 of the 100 possible points, which is not high enough.  The score is below the 60-point threshold, and, therefore, 3M does not qualify at this time for consideration by value investors.

Check back here occasionally for updates to the Overall Score, which can change when the company releases new financial results and when there's a significant change in the company's share price.

This analysis reported here is not, by any means, a complete evaluation of the subject company, and it does not consider all material facts about the company's operations, finances, or future prospects. The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate. Readers are encouraged to independently verify all data. Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  The analysis is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The methodology and results are subject to change without notification.

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 #3m    #mmm    #gauges  #gcfr  #gcfr2 #valueinvesting   #financialanalysis