About the company

3M is an american industrial conglomerate which provides diversified tech services all over the world. Founded in 1902, it works in four business segments nowadays: industrial safety produces industrial abrasives, iron industrial solutions, packaging technologies, healthcare packages. Its transportation and electronics segments creates ceramic semiconductors, sound- and heat insulator products, traffic safety solutions. Healthcare segment is operating on health protection, protecting clothing and health and safty areas. Consumer goods segment produces a wide range of products including bandage items, insulating materials, home care, home improvement, medical and dental products, stationery and office.

Financial analysis

Regarding the last five years, the company's financial position is stable. Its revenue has not changed much, it is doing $32-35 billions USD yearly. Its EBITDA is also steady. EBITDA comes out to 24-26% of the revenue, this will presumably not change in the coming years.

Although the return of equity propotional is decreasing, this 40% is still remarkable on the market. 3M operates with a high return of equity on a mature market.

Its divident yield has been increasing, reaching close to 5%. In comparison to an average yield of a 10-year treasury bond it provides a higher yield up to 1,2%.

DCF analysis

As the company's D/E rate is relatively steady and its divident/FCFE rate is below 80%, we are going to use FCFE analysis.

FCFE analysis

We got the yield of the 10 year treasury bond as the risk free rate (3,43%), and we used the last 80 years average premium for the US market as equity risk premium (4,4%) during the analysis. The level of cost of debt is coming from the company AAA bond rating. Calculating with these data we got 6,17% weighted average cost of capital (WACC). We assume that the net income of the company will decrease by 0,64% in the next 5 years but after it will grow by 2% annually. Return on investment capital is 16,03% at the company.

Net income is slightly decreasing year to year, so the FCFE figures are decreasing slightly of course. Discounting the FCFE figures by cost of equity we get the value of 74,264 billion USD for the Company, which generates 314,56 usd/shares value with the cash and cash equivalents and the 551,9m shares outstanding. Using our level of margin of safety we get 88,8 USD share price.

Index based valuation

The return of invested capital is stable , 15-16% a year, this is much higher than the WACC meaning that the company creates shareholder value. It produces much more yield on invested capital (cca. 10%) than the cost of capital. The company D/E rate is between 2 and 3 however it is closer to 2. Its leverage is not big, but a value below 2 would be preferable. The price-to-book ratio has decreased significantly for the last five years, from 11,64 to 4,58. Considering that the share price has decreased and the equity has grown, the company has become cheaper. Due to the decreasing share price and the gradually increasing earning per share, the P/E rate is decreasing and the company is becoming more attractive by valuation perspectives.

Company dividend increasing from 5,44 USD to 5,96 USD, dividend growth rate is cca 2,3% p.a. Important thing that the net income could cover the dividend payout, 58%-60% of the net income is paid out as a dividend, the rest is for reinvestment.

It is quite surprising that in 2018 the company paid out a higher dividend to shareholders than it was supposed to do but in the last three years it could pay out easily 8,2 - 8,3 USD as dividend, but it held back a bigger proportion of mone, therefore its current divident is well covered in the last few years.. Cash to stockholders to FCFE rate shows the propotion the company FCFE pays back to share holders as dividend and shares repurchases. In the last 5 years this is the 1,29-fold of its annual FCFE.

Relative valuation

According to current exchange rates and other data:

Based on its P/E, the company is considered a strong buy compared to its competitors. The sector average is 16,22 and it has currently 9,65. As for P/BV, P/S and EV/EBITDA indexes, it is slightly overvalued.

According to the relative valuation using the sector averages the fair price of 3M share is: 169.81 USD (P/E basis) 74,1 USD (P/BV basis). 83,66 USD and 87,05 USD (on an P/S and EV/EBITDA basis).

Based on a conservative valuation the price of 88,8 USD should be proper on relative valuation as well, buying the shares at this price level the buying opportunity is a bargain.

Our recommendation

According to our calculations, 3M has a stable revenue and EBITDA generation. Its leverage is appropriate, its dividends increasing which is sustainable.

According to FCFE analysis we have received a 134,56 USD fair price. With a margin of safety the price is 88,8 USD which is supported by our relative analysis.

Based on the index based valuation and the relative valuation we suggest to accumulate slowly the shares at 100 USD price, if the price will drop further by 15%, our recommendations will be strong buy. Assuming that the dividend will not decrease in the future the dividend yield - at price 88 USD - would be 6,5%-6,7% which will support the share price further.