|
Published: May 7, 2010
There are some companies that are a part of your life and you
don't even know it. They have so entrenched themselves in our
daily life that when you grab one of its products, you don't
even give it a second thought. These companies advertise their
products to you all the time, but you aren't even aware that the
product is part of a gigantic, global brand name that you know
and recognize. These are the types of companies often make for
excellent long-term core portfolio positions.
3M (NYSE: MMM) is one such company. It's been around
since 1902, if you can believe it and publicly traded since
1970. The stock returned 44 times its initial price during that
period and pays a dividend of 2.4%. The company is still quite
profitable, and it is not going away any time soon.
Now, just looking around my home, here's how deep into an
average person's life 3M has drilled: CD-ROMs, Nexcare band
aids, Scotch tape, Scotch tape dispenser, Scotch-Brite detergent
(and pads), Oxy Carpet Cleaner, Post-It Notes, Scotchgard (on
the couch), O-Cel-O Sponge cloth, Scotch Cassette Deck Head
Cleaner, 3M cushioned mailers, 3M glue sticks, Scotch
micro-fiber cleaning cloth... and that's only three rooms!
Many companies grow via acquisition. Not 3M. They just keep
making things that people need. The company's quality is such
that it has no trouble obtaining distribution outlets for
products and the kinds of products it sells are so ubiquitous
that there's tons of real estate to get their products into.
In today's global economy, whatever
consumer staples Americans need, citizens of other countries
need as well. 3M is truly a global empire, and with the
exception of the desert, there's no reason it's reach cannot
rival that of Coca-Cola's (NYSE: KO). It doesn't even
limit itself to consumer repeat purchase products. The company
has a huge presence in industrial supplies, displays and
graphics, health care, security, transportation and
communications.
It's imperative that an investor understand just how diverse
this product mix is, because that's the reason it should be
considered a core holding. It's also the reason for 3M's
continued strong financial results. The most recent quarter
showed a +25% increase in revenue over last year, to $6.35
billion. 3M sells a lot of what it sells, but even company
executives were shocked at the growth.
This led to a +75% increase in earnings
over the same quarter from last year. With the most recent
Consumer Confidence report showing the highest level since
September of 2008, and first quarter's GDP growing at +3.2%, it
suggests that 3M may be in the midst of a new sales surge.
Analysts are projecting +16% earnings growth this year, and +11%
annually during the next five years. Not bad for a company
that's more than a century old. A company this reliable also
tends to earn a
PEG ratio that's significantly higher than 1.0, yet the
company's PEG sits at just 1.05. It's also useful to compare it
to a similar company to see if it represents a relative value.
3M is sometimes considered a competitor to Johnson & Johnson
(NYSE: JNJ). This venerable entity is only projected to grow
+7% during the next five years and has a current PEG of 1.84.
Relatively speaking, 3M is the bargain.
Add to this the fact that 3M generated $4 billion in free
cash flow last year, and it's a wonder that the dividend is
only 2.4%. Nor is there a reason to pay down $5 billion in debt,
when they can keep cycling that money into the company,
inventing and innovating the next generation of products. This
innovation should be highlighted, because it demonstrates a
company that will not just rest on its laurels and fade into the
sunset . The company routinely spends about 5% of revenue on
R&D. The results are impressive. 3M just snagged two Gold Awards
at the Edison Best New Products Award ceremony, one for mobile
projection technology and the other for a stethoscope that
improves the ability for physicians to hear and interpret heart
sounds.
All in all, 3M truly fits the definition of what Peter Lynch
called a "stalwart". It's here to stay, and is a great selection
as a core holding in a diversified portfolio.
-- Frederick Steier
Contributor
StreetAuthority |
